As the Australian stock market continues to essentially drift sideways perhaps now is a good time to step away from looking at individual stocks and look at which sectors have been moving the wider S&P/ASX 200 (XJO) Index. To do this I am going to focus on six S&P/ASX 200 sector indices namely the S&P/ASX 200 Consumer Staples (XSJ), S&P/ASX 200 Financials (XFJ), S&P/ASX 200 A-REIT (XPJ), S&P/ASX 200 Consumer Discretionary (XDJ), S&P/ASX 200 Materials (XMJ) and S&P/ASX 200 Industrials (XNJ).
In each case, I will use a two year chart for each Index plotted against the performance of the S&P/ASX 200 Index. The aim of the exercise is to simply show which sectors have been pulling the ASX 200 up and which have been acting as a bit of a drag over the last 2 years.
First up – the S&P/ASX 200 Consumer Staples Index which covers businesses that are less sensitive to economic cycles including manufacturers and distributors of food.
S&P/ASX 200 Consumper Staples Index (XSJ) 2 year chart
Clearly this sector has been supporting the ASX 200 and over the last year has performed quite well. I don’t see this as indicating that companies in this sector are doing particularly well just that they have rallied from being oversold with interest rate cuts also helping to give these companies a boost. Stocks in this sector are often defensive by nature and we may see this sector resume moving sideways for the rest of the year.
Another sector which has bounced back strongly has been the financials as we can see from the chart below.
S&P/ASX 200 Financials Index (XFJ) 2 year chart
Again I see the movement in the sector being related to coming from an oversold position and my guess would be further major gains are unlikely this year in this Index.
S&P/ASX 200 A-REIT Index (XPJ) 2 year chart
Another good performer has been the A-REIT`s (Australian Real Estate Investment Trusts) and many stocks in this sector also pay good yields, so over the last two years this has been a good place to be. This Index has been on the rise for two years and I believe this is more about shaking off the fear around this sector caused by the GFC rather than simply coming from just being oversold like the other sectors were around a year ago.
Now for an Index which is often a bit more lively.
S&P/ASX 200 Consumer Discretionary (XDJ) 2 year chart
The S&P/ASX 200 Consumer Discretionary Index covers stocks which are more sensitive to the fortunes of the wider economy. These include household durable goods, textiles, leisure equipment plus services such as hotels, restaurants and consumer retailing.
Basically when times are good people tend to spend more on things other than the basics but when the economy slows, this sector can be hit hard. This Index wasn’t really doing much until December last year and I put down much of the rise in the XDJ to interest rate cuts. This Index may get another lift if the RBA cuts rates again, but it looks like it is running out of steam to me as far as its current rally goes.
This is a good Index for investors to watch as it will probably roll over fairly quickly if consumers start to worry more about the economy and also as the impact of the interest rates cuts begin to wear off.
Now for some sectors that have not done so well.
S&P/ASX 200 Materials Index (XMJ) 2 year chart
The S&P/ASX 200 Materials Index (XMJ) covers range of commodity-related manufacturing industries and has been hit by the high Australian dollar over the last few years plus a general malaise which seems to have gripped the manufacturing and industrial sector across Australia.Added to this the end of the mining boom and the expected decrease in mining related CAPEX have given many stocks in this area quite a battering.
This is certainly one sector which is keeping the wider S&P/ASX 200 (XJO) in check and I reckon it will continue to act as a drag on the XJO for the rest of the year at least.
S&P/ASX 200 Industrials Index (XNJ) 2 year chart
Finally the S&P/ASX 200 Industrials Index (XNJ) which surprisingly has held up fairly well, however this sector is going to struggle over the second half of the year I believe unless of course the Chinese unleash another round of stimulus spending which will in turn lift all sectors.
In conclusion, my impression after looking at these charts is we are set to see the Australian stock market drift sideways over the second half of 2013 or even drift backwards a touch. Of course developments in the U.S, China, Japan and Europe will give our market a push or pull from time to time, but it’s still hard to see at this stage what would drive the market much higher from the current level.