“A rising tide lifts all the boats”

  • apochryphal, often attributed to J.F. Kennedy

Remember the glory days of 2010 and 2011? All you had to do was own a stock portfolio – the rising tide of central bank monetary stimulus meant all the boats lifted (almost). 

Those days are long gone. The Australia 200 index is up just 2% for the year so far. However, the type of market was well flagged. One year ago I looked at the performance of the market over 2015 and ahead to 2016 on this blog and on Peter Switzer's site:

“…there is a higher potential for the market to repeat its 2015 path, swinging between support around 4,800 and resistance at 6,000. A significant breach of either of these extremes would point to a new outlook, but the market is broadly sideways until then.

Therefore the highest returns in 2016 will once again likely go to active investors – those who take advantage of market swings, cashing in good gains and buying when sentiment is sour.”

Further:

“While the index is sideways to down for 2015, underlying sectors were considerably more volatile. The Energy sectors shed more than 35% peak to trough, and Industrial stocks as a group are up 20% since January. Drilling down yields some extraordinary stock performances. Blackmore’s is up more than 400%, Slater and Gordon is down more than 90%.

These types of swings in an overall steady market mean the higher risk and reward profile of active investing could be attractive to former ‘buy and hold’ investors.”

The chart above shows just how different market conditions are, by comparing the performance since the start of the year of stocks selected from 9 of the 11 official market sectors. This is the raw share price move. It’s expressed as a percentage, to allow comparison. In considering overall returns, investors also take into account dividend yields and any other returns, such as rights issues or special dividends. Nonetheless, it’s a fair snapshot of the performance of these stocks.

The first thing to check is the scale on the right. The best performing stock, Rio, is up 30%, and at one stage was up almost 50%. The hardest hit is Qantas, down 22% for the year, after recovering from a 35% drop. The difference in performance shows just how important it was to invest in the right sectors, and the right stocks.

Even within sectors it was a difficult year. The consumer discretionary sector is a good example. An investor may have decided in June that consumer confidence and activity was growing, and sought an investment that benefited. A gambling or gaming stock? The investor may have chosen Tatts Group, and enjoyed watching the stock soar under takeover bid. Or Crown – and watched their investment crumble as market doubts about Crown’s China strategy hit the share price.

Many of the events that drive stock prices are unpredictable. Diversification is a reasonable approach to managing individual stock risk. Investors with narrowly spread portfolios most likely had a volatile year.

The good and bad news is that 2017 promises more of the same. A modestly positive economic outlook accompanied by significant global risks. Threats from Europe, from the Americas, and sentiment a key driver of market action. Adding to the mix is the now conflicting stances of central banks, as the US Federal Reserve lifts rates while the Bank of Japan and European Central Bank continue to accommodate. This could see volatility increase even further, adding to the call for an active approach to markets.