Marginal overall gain hides significant inter-market performance dispersion
Written and accurate as at: Jun 02, 2016 Current Stats & Facts
The local equities market continued its march higher last week with the S&P/ASX 200 adding 1% and rounding out its seventh straight weekly gain. Since its bottom in mid-February the market has staged a strong rebound that has put the index back above the 5,400 level.
Importantly, the breakdown of contributors reveals a high degree of dispersion at the individual stock and sector level. At one end of the spectrum, Financials added 1.5% while Consumer Staples suffered by 1.7%. The return profile fits with our expectations for modest returns at the index level, but significant stock-specific opportunities.
Investors’ attention from a macro standpoint was centred on firmer US rate hike expectations. Recent FOMC member speeches have struck a more hawkish tone and this was echoed in an address from Chairwoman Yellen on Friday. While Dr. Yellen has been perceived as the most cautious of the Committee, she suggested improving economic data made a stronger case for raising rates in the near term. Her comments overshadowed the release of revised Q1 GDP data that revealed the world’s largest economy grew at an annualised rate of 0.8%, which was higher than the previous 0.5% estimate.
Looking ahead, the US rate story will continue to rumble in the background and can be expected to have its largest impact on bond-sensitives and the gold miners. The gold space is particularly vulnerable to profit-taking given its strong outperformance over the past several months. The bond-sensitives are also in danger of a retracement given they have proven more sensitive to US than local rate changes in the past. Additionally, their current prices suggest very little value with yields now at very low levels.