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Review of S&P/ASX 200 Sector Indices: XNJ, XDJ, XMJ, XPJ & XJO.

September 21st, 2011 · Greg Atkinson · 13 Comments

In the midst of all this market madness it might be useful for investors to sit back and look at what various sectors of the Australian stock market have being doing over the last ten years to see if we can spot any emerging trends.  We all know for example that the resources sector has been generally kind to investors over the last few years but will it continue to be a strong performer in the years ahead?

Normally when I write about the stock market over the long term I use charts of the ASX All Ordinaries (XAO) and S&P/ASX 200 (XJO) Indices.  Today I am going to dig a little deeper and look at some of the sector Indices to see what they might be telling us.

Let’s start by looking at the Industrials sector.

S&P/ASX 200 Industrials Index (XNJ) 10 Year Chart

xnj-10-year-chart-sep-11

The S&P/ASX 200 Industrials Index (XNJ) includes listed companies involved in the manufacture and distribution of capital goods or the provision of transportation and commercial services for example.

The chart above suggests that this sector has not done much except bounce off the low of early 2009.  More worrying is that it has been essentially drifting downwards for most of 2011 and it doesn’t look like it is poised to rally strongly this year.

Next we can look at an Index which may indicate how freely consumers have been spending.

S&P/ASX 200 Consumer Discretionary Index (XDJ) 10 Year Chart

xdj-10-year-chart-sep-11

According to the ASX website:  ‘The S&P/ASX 200 Consumer Discretionary Index (XDJ) encompasses those industries that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel and leisure equipment. The services segment includes hotels, restaurants and other leisure facilities, media production and services, and consumer retailing and services.’

Again this chart suggests that this sector really has not done much except bounce off a post Lehman Brothers low.  What is more worrying is that over recent months the Consumer Discretionary Index has slumped and it also appears to be indicate that consumers have been less inclined for quite some time, to spend freely.

The consensus view might be that the Australian economy sailed though the Global Financial Crisis (GFC) in good shape, but so far it’s hard to see much evidence of that by looking at the charts.

But there is of course one sector which has shined: Materials.

S&P/ASX 200 Materials Index (XMJ) 10 Year Chart

xmj-10-year-chart-sep-11

The S&P/ASX 200 Materials Index is made up of a wide variety of commodity related industries and rallied pretty strongly from early 2009 until early in 2011 as well as enjoying a long rally between 2003-2008 before that.

What worries me is that this sector appears to be losing steam and this could be indicating that the commodities cycle is turning downwards.  If commodities prices were to enter an extended period of decline then it’s almost a certainty that the Australian economy would slide into a recession.

Next let me display a chart of a sector that has had a horror run and continues to have a horror run:  Australian Real Estate Investment Trusts or A-REIT’s.

S&P/ASX 200 A-REIT Index (XPJ) 10 Year Chart

xpj-10-year-chart-sep-11

You will not find too many stock market Index charts that look as sick as the one above.  The S&P/ASX 200 A-REIT Index collapsed as a result of the GFC and quite frankly doesn’t look in good shape even today.  Simply put, A-REIT’s are  struggling and I doubt they will recover lost ground for many years.

We have to be wary of reading too much into charts, but what appears fairly clear to me is that if you break the Australian stock market into sectors then widespread weakness is evident across a number of Indices.   It isn’t just the high Australian dollar creating this weakness, but instead a broad range of geo-political issues are at play and these are likely to keep the Australian stock market subdued for quite some time.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


13 responses so far ↓

  • 1 ken dorge // Sep 22, 2011 at 7:15 am

    brilliant. I learn something each time! I wish more commentators could be so clear and not have their own conflicts of itnerest which prevent them making more than soothing ambiguous comments. from what you say, I can clearly see that stodgy passive investors move out of industrials, consumer discretionary and real estate sectors at least!

    am still learning how hard it is to separate the bull[!] from the truth!

  • 2 Greg Atkinson // Sep 22, 2011 at 8:45 am

    Thanks Ken. I learn something each time I write which is one reason I started this humble blog. It is indeed hard to sort out fact from fiction and the waters also get muddied by commentators, companies, politicians & officials pushing an agenda.

    I am not suggesting my analysis is faultless that’s for sure, but the charts do show which sectors are out of favour and it doesn’t make sense to me for people to suggest that the Australian economy was effectively unscathed by the GFC.

  • 3 Leigh // Sep 24, 2011 at 5:16 pm

    Thanks Greg, the charts certainly show that it is a bit difficult to find that underlying economic strength we are still hearing about. However, even if there are further falls to come, some of our companies are looking good for take overs. It appears Foster’s is going to overseas interests after the FGL board changed their mind for 50cents a share more. They had claimed it was a great company with a great independent future, but now they are willing to sell for a dollar under what it was worth four years ago. It doesn’t inspire confidence in the kind of management we have in this country. There seems to be no long term commitment to anything.

  • 4 Greg Atkinson // Sep 25, 2011 at 7:56 am

    Leigh as you probably recall prior to the GFC ‘financial engineering’ was all the rage and in Australia this lead to a management style focused on finding value in spreadsheets rather than developing long term business or product strategies.

    I guess Fosters (FGL) did try to develop a broader product strategy by getting into the wine business but as we know now, that didn’t work out well.

    Meanwhile many overseas companies have been snapping up stakes in Australian companies or launching outright takeovers as in the FGL case.

    In terms of large multinational corporations, Australia punches way under it’s weight and if it wasn’t for mining we probably wouldn’t even be on the radar.

  • 5 Lachlan // Sep 25, 2011 at 12:13 pm

    pretty bearish action on those charts particularly the last one which looks set for a sudden drop

  • 6 Biker // Sep 25, 2011 at 1:34 pm

    ? ECB to cut lending rates from current 1.5 per cent to near zero
    (?)

    ? Interest rate cuts in Asia and Australia before Christmas
    (?)

    Read more: http://www.watoday.com.au/business/buckle-up-for-apocalypse-dow-20110924-1kqsq.html#ixzz1Yw3ZnuqX

    Vancouver’s pollies / media pushing stronger trade alliances with China… . Interesting, considering their close(st) neighbour…

  • 7 Greg Atkinson // Sep 26, 2011 at 9:38 am

    Lachlan those charts indicate what we have been talking about some years on this site i.e. the Australian economy is not multi-speed, it’s dangerously unbalanced. I can’t see much that would suggest to me that Australian economy is robust either, rather I see signs that the focus on the mining boom has resulted in the economy becoming lazy. (if that makes any sense)

  • 8 Biker // Sep 26, 2011 at 1:16 pm

    Greg: “the mining boom has resulted in the economy becoming lazy”

    Trying to recall who it was who commented recently that an ingot of gold had little more productive value than a housebrick.

    We’d probably all agree that it’s far easier to dig-and-ship than to actually _make_ something, but I’m yet to read anything here, or on any other site, just _how_ we’re supposed to compete with countries manufacturing high quality goods… with lower wage-cost structures than ours.

    Even the (past) most competitive manufacturers, like the US, with average wages around 40% lower than ours, are steadily losing the battle against Asia; or creating factories offshore in Asia. (Used to be Mexico!)

    We’re not alone in this resource dig, by the way. Talking with several Canadians over breakfast this morning, I was advised that timber they ship to China is unprocessed… no value adding whatsoever. Like Aussie wages, Canadian labour costs are just too high, comparatively… .

    Don’t imagine you’ll change that too quickly, Greg!~ 😉

  • 9 Greg Atkinson // Sep 27, 2011 at 5:21 pm

    Biker Germany, France and Japan are not low cost base nations but they still manage to manufacture a range of products from electronic goods to trains and even satellites.

    As for Canada, well they still make aircraft which are exported all over the world..something we gave up on years ago.

  • 10 Ned S // Sep 28, 2011 at 12:43 am

    Commonsense says if you have high labour costs, you concentrate on exports that require minimal labour – Large scale agriculture maybe??? (Recall seeing pics of combine harvesters side by side in the US rolling south to north {I think?} through THEIR wheat belt once that looked pretty impressive.)

    Either that or you get into stuff like Jarhlesberg Cheese maybe(?) that only you know how to produce. Or stuff that (by and large) you have plenty of while other nations don’t – With opal and sapphire coming to mind in Oz – And actually monopolise the market like De Beers did many years ago re ‘sparklers’ maybe?

    Yep, they sound like silly ideas to me too! – What better ones are floating around?

  • 11 Biker // Sep 28, 2011 at 7:56 am

    Well, yes, the French Concorde _might_ not be a good example… I’m not partial to Renaults, Citroens or Peugeots; and I see Mercedes are now offshoring some 4WDs to Korea; but Japanese Subarus, Hondas and Toyotas are probably the way-to-go.

    Bottom line: If Oz is open wide for manufacture why aren’t you and I creating start-ups? Could be that the fail-rate of new businesses in Oz is (claimed to be) 50% in the first year… 🙂

  • 12 Lachlan // Sep 28, 2011 at 9:47 pm

    In my view Oz still sits better in an age of failing currencies, even though our national debt is 78B (8B per capita) we do actually have something tangible to swap for things… unlike some others also with high labour costs. So like Canada if/when the USD and Euro puke, possibly not in that order, there should be capital flight here ie picking survivors in a liquid global currency crash. No shorts on the AUD then. Whatever happens next the continent will still have commodity wealth to start over. Not sure who will benefit from it most.

    But yes I agree with dangerous imbalances Greg…a globalisation side effect. Today I watched a truck load of new miners utes pass by near Roma and the gas spending is unreal, yet around that the despair/decline of farmers is obvious.
    Got veges then 😉 …apparently vege gardener has em

  • 13 Greg Atkinson // Sep 29, 2011 at 7:40 am

    Lachlan natural resources are for sure a major benefit to an economy but I would add, if managed correctly. Our iron ore & coal sectors might be doing a lot for GDP, but probably a lot less for GNP? I sometimes wonder if we have talked ourselves into overstating the ‘mining boom’?

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