A volatile year for Australian equity investors

The ASX200 finished up a relatively modest 2.6% on a total return basis for the year. Stripping out dividends, capital growth for the index was actually -2.1%. While total returns were relatively flat, investors experienced a volatile ride as can be seen in the chart below.

ASX 200 Accumulation Index performance

Source: Bloomberg

Significant divergence in performance across sectors, stocks and fund managers

Overall market returns left much to be desired for investors, particularly in the resources and energy sectors. BHP Billiton and Rio Tinto were down 33% and 23% respectively. Energy companies had an even tougher time with Origin Energy and Santos falling a staggering 54% and 49% for the year. However there were a few standout companies, particularly those with exposure to the rising Asian consumer, with Bellamy’s and Blackmores rising 725% and 519% respectively. Qantas also saw its fortunes rebound in 2015 rising 70%.

This divergence between stock and sector performance saw marked differences in returns between fund managers with a 45% difference between the top and bottom performing active Australian equity funds over the year. Funds that were aligned with the benchmark, including index based funds, also tended to fare poorly in a total return sense. 

Active stock picking key to delivering returns to investors in 2016

The market opened the year in a sea of red, predominantly driven by concerns over China and the effect of further interest rate rises in the US. Oil and mining companies continued to fall on the back of poor supply and demand dynamics. However, whilst there is reason to be cautious, we continue to see opportunities in the Australian market for active stock pickers.

In fact, we believe the biggest risk for investors in 2016 is being constrained to the benchmark. In our view, those companies that make up a large portion of the typical index fund (resources & banks in particular) are likely to face continued headwinds.  This suggests that 2016 will again be a stock pickers market.

Resources continue to face strong headwinds, from excess supply and weak demand in China. We believe spot commodity pricing is not yet reflected in share prices. If this is the case there may be further reason to be cautious in this sector.

Yield stocks, largely driven by the banking sector, may maintain their valuations but further outperformance will be challenging. The payout ratio for the market is now 78% - the highest over the past 20 years. This will limit dividend growth for many companies without support from earnings growth.

Opportunities for those that know where to look 

We believe the biggest opportunities over the next year will be Industrials, particularly those companies with offshore earnings. The offshore based earners will benefit from any further depreciation in the Australian dollar, as well as any improvement in US growth. Domestic Industrials are also seeing some increase in business confidence and an improving consumer discretionary spend from recent wealth increases. 

Cutting through the noise and identifying the best opportunities during times of poor market returns and volatile pricing can be difficult. However, history tells us that this can also be a good time for disciplined investors to find compelling opportunities at attractive prices. Knowing what to avoid, and where to look for the opportunities, is going to be key for generating returns for investors in 2016. 

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