One of the largest risks for the Australian market is the concentrated exposure to two sectors, miners and financials. The aggregate value of these two sectors make up up to 40% of the market which is not ideal if your trying to own a diversified portfolio. However we think the period of the underperformance for the miner is over but that doesn’t mean the economy will be firing on all cylinders anytime in the near term.
The financials which mainly representing the banks will struggle going forward given the impact of Covid-19 on property prices. The market has already discounted the share prices of the banks in anticipation of increase in non-performing loans in the near future.
The differences between the ASX 300 Metals Mining Index verses ASX 200 Financial Index in the last year clearly shows there has a been a regime change.
|ASX Index||Sector||YTD||6 Months||1 Year|
|Mining Sector (XMM)||Mining and Metal||-0.39%||4.14%||4.99%|
|Financial Sector (XFJ)||Financial Services||-13.00%||-13.14%||-7.91%|
|ASX 300||Market Index||-22.90%||-22.77%||-24.16%|
The outperformance of the miners can be attributed to fall in the Aussie dollar and expectation that while the worst is not over for China after covid, it could’ve been alot worse. The fall in the bank shares reflect the view that the domestic economy will not have a V shaped recovery and any return to trend economic growth will be painfully slow.