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Mixed views on ASX 20 outlook

Nicki Bourlioufas  |  13 Aug 2018Text size  Decrease  Increase  |  
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The large-caps outgunned smaller companies over the financial year, but industry insiders question whether this will continue in the face of external threats.

The S&P/ASX 20’s rise this year almost matches that of the Small Ordinaries Index, a surprising result given the smaller companies’ outperformance last year.

In particular, the ASX 20 has this year been pushed up by CSL Limited (ASX: CSL), also helped along by the supermarkets and energy companies.

CSL’s share price has jumped around 43 per cent over the year to date at the time of writing, compared to 6.1 per cent for the S&P/ASX 200, 6.2 per cent for the S&P/ASX 20 and just 3.6 per cent for the S&P/ASX Small Ordinaries Index.

Of the other stocks in the ASX 20, BHP Billiton (ASX: BHP) has returned 5.5 per cent, Insurance Australia Group (ASX: IAG) has jumped 13.6 per cent, while Wesfarmers (ASX: WES) has gained 12.8 per cent and Woolworths (ASX: WOW) 8.7 per cent. Macquarie Group (ASX: MQG) stood out among financials, returning 23.8 per cent this year.

Large caps beat small with dividends

The ASX 200 has returned about 7 per cent year to date, including dividends, which is a great outcome as we're not even two-thirds of the way through the year, says AMP Capital portfolio manager Dermot Ryan.

"In large caps, we have seen gains dominated by healthcare and other growth sectors like IT, both of which we see as being very expensive relative to the growth and cash flows that the sector is likely to achieve.

"To avoid a pullback, this part of the market needs to deliver on profit growth as we go through the reporting season," Ryan says.

banks commonwealth royal commission

The big four banks are unlikely to recover quickly from the Royal Commission

Gains in CSL and BHP have offset losses for the big banks, which are unlikely to recover quickly from the Royal Commission’s revelations and lacklustre earnings growth, according to Ross McMillan, senior analyst, manager research at Morningstar Australasia.

"CSL, BHP and Woolworths would have helped the large caps, while the big banks and Telstra would have hurt.

"It is difficult to predict next 12 months, but large caps are likely to be negatively impacted by further fall out from the Royal Commission and global factors such as trade wars, Trump’s policy lurches, plus Telstra has a long road ahead,” says Macmillan.

He views small caps as "more isolated by industry factors and more linked to the domestic economy".

"The wild card in Australia is that a Federal election must occur in the next 10 months, most likely late In the first quarter of 2019 – and stock markets hate uncertainty,” says Macmillan.

Valuations are overdone

The blood-plasma biotherapy company is overvalued, according to Schroders' head of Australian equities, Martin Conlon.

"Eventually, if real cash profits do not follow valuations, gravity will unwind the artificial market value creation," Conlon says.

He refers to prominent local healthcare companies CSL, Cochlear and ResMed – up 24 per cent, 10.2 per cent and 14.5 per cent, respectively – as reporting margins and returns on capital that are "stratospherically higher than the broader market".

“None sell their products into free markets. Customers generally don’t pay the bill, taxpayers or insurers do," Conlon says.

He believes valuations are "extrapolating and vastly increasing these already high profits, on the expectation that competing therapies in the longer term can be ignored and government buyers will remain happy to be fleeced".

Telstra a bargain

Schroder’s Conlon also has contrary views to the market on Telstra, holding an overweight position to the large telco.

"The valuation continues to reflect far lower profits than current, and very mediocre longer-term return on capital for a business that continues to successfully defend its market leading position," Conlon says.

"We believe most of the issues facing Telstra should be transitory. Nevertheless, the plans on cost saving in a tough operating environment remain more crucial than ever, and evidence of success on this front sparse."

 

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Nicki Bourlioufas is a contributor for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a Morningstar contributor.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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