Overall the Australian stock market ended 2014 basically where it started which taking into account the slide in commodities prices, was actually a good outcome. However if we scratch under the surface a little and look beyond the S&P/ASX All Ordinaries Index (All Ords) we can see why the market held ground in 2014 and perhaps gain an insight to what may happen in 2015.
To start with let’s review how the S&P/ASX All Ordinaries Index fared during 2014 – a year in which it edged up only around 1%.
S&P/ASX All Ordinaries (XAO) Index Chart – 2014
After modest correction early in the year the ASX All Ords recovered strongly and had by mid August, broken through and held above the 5600 points level. At around this time the market bulls were out in force and various articles about how the market was poised to hit 6000 were popular in the finance media.
However as I wrote on several occasions throughout the year, I could see few fundamental reasons why the overall market was heading upwards and I reckoned it was only a matter of time before a significant correction dragged the All Ords/ASX 200 back towards the trading ranges I have written about during the last few years.
This correction came along in September and took the All Ords below 5200 after which it was a fairly bumpy ride to the end of the year to just over 5400.
Still if you factor in say 4% for dividends then it would have been quite possible for a stocks portfolio to have provided a total return (including un- realised gains) of say 5% or more. If investors had held stocks in areas other than those related to mining, energy and commodities then even higher gains would have been possible and many short term stock traders may have also fared well.
Although the All Ords/ASX 200 ended the year basically where they started, it was still better than I expected since I believed a finish lower than 5000 was likely as I wrote in my Australian Stock Market Outlook & Forecast for 2014 A the major reason for this higher than expected finish was that overall the banking & financial sector posted gains for the year, whereas I expected these stocks to eventually give ground as commodities prices fell further.
Remember that generally speaking, the All Ords and ASX 200 are driven up or dragged lower by the major financials stocks and large miners or commodities related stocks. So although 2014 finished the year on a bad note for commodities, this was countered by a generally positive year for the financials.
We can see how this played out in a couple of ASX 200 Index charts.
S&P/ASX 200 Materials (XMJ) Index Chart – 2014
Up first is the ASX 200 Materials Index (XMJ) which covers mining related stocks plus those related to the manufacturers of chemicals, construction materials, forest products and metals companies including steel producers. On this chart we can see how these stocks started to fall before the wider correction hit the ASX All Ords/ASX 200 and then recovered only slightly before the end of the year.
S&P/ASX 200 Financials (XFJ) Index Chart – 2014
On the other hand the ASX 200 Financials Index finished the year higher and had recovered most of what it has lost during the correction that started in September. This had a positive impact on the overall market and helped the All Ords to finish the year slightly higher.
But why the stocks in this sector continue to rise while fundamentally the Australian economy is an area of concern I doubt this Index can keep rising for much longer before it falls back towards and possibly below, the 6000 level.
We can also see the weakness in the Australian economy reflected in the S&P/ASX 100 Small Ordinaries Index. This ASX Index is a good way to monitor how the smaller ASX listed companies are faring.
S&P/ASX 100 Small Ordinaries (XSO) Index Chart – 2014
The Small Ordinaries Index (XSO) finished 2014 down around 6% and in 2015 this will be one Index that I will be again watching closely. Clearly smaller listed company stocks had a tough year in 2014 and there is not a lot to suggest they will fare much better this year either.
However these smaller stocks that may provide good returns when the economy turns around, the trick of course is to know when that will happen!
Looking back on 2014 I’d say that it was surprising that the Australian stock market was able to finish the year with a gain (albeit a small one), and that that at the moment I remain cautious regarding the outlook for the Australian stock market and Australian economy for at least the next few months.
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp