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Midcaps lead the way as ASX beats the yanks

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By Paul Rickard

For the first time in many months, the Aussie stockmarket has outperformed our yankee cousins. In October, it added 4% to take the year to date gain to 4.3%, or with dividends included, a not wholly unimpressive 8%.

The US market, as measured by the broader S&P 500, added 2.2% in October. Year to date, it stands at a more impressive 15% or 16.9% if dividends are included. The tech heavy NASDAQ 100, which includes Apple and the FANGs (Facebook, Amazon, Netflix and Alphabet, the parent of Google), is up by a cool 25% in 2017.

And while a return of 8% for 10 months looks ok, many investors are not witnessing this level of return. This is because the aggregate number masks the performance of the underlying components, and the top stocks, which make up the bulk of many retail investors’ portfolios, continue to underperform.

The following table shows the performance of the different components. The top 20 stocks have only returned 4.2% (including dividends) in 2017, due to the underperformance of the banks, retailers and Telstra, which are all struggling to grow revenue. Of the top 20, only CSL and Macquarie could currently be described as genuine ‘growth’ stocks.

ASX Component Returns, October and CY 2017
 
 
The midcap 50, which represents stocks ranked 51st to 100th by market capitalization, has returned an astonishing 15.5% in 2017. The small ordinaries, which represents stocks ranked 101st to 300th by market capitalization, roared back to form in October with a gain of 6% and is now up by 11.9% this calendar year. Improving metal and oil prices, and increasing activity in the resources sector, is helping this part of the market which has a higher weighting to materials and energy stocks.

Midcaps

The midcaps are also quite different to the ASX 200. Shown below is a pie graph of the sector weights for the Midcap 50. Financials, which is the biggest sector on the ASX 200 by market capitalization, with a weight of 37.2%, makes up only 18.8% of the Midcap 50. Other relative underweights include Consumer Staples, Energy and Real Estate. Overweights (compared to the ASX 200) are Materials, Consumer Discretionary, Health Care, Industrials and Information Technology.

Midcap 50 Sector Weights

36 of the 50 stocks that make up the index are in the black for the year, with Flight Centre the best performer, up almost 50%. Building materials and resources companies are strongly represented in the top ten.

Midcap 50 - Top 10 Performers in 2017

Only 14 stocks are recording losses, the worst being one of the best performers in 2016, Dominos Pizza, with a loss of 28.3%. Interestingly, the bottom 10 includes retailers JB Hi-Fi and Harvey Norman, which have suffered due to concerns about Amazon, and telecommunications companies TPG and Vocus.

Midcap 50 - Bottom 10 Performers in 2017

How to play

While some of the stocks in the midcap 50 are getting a touch expensive, the top 20 stocks are likely to remain somewhat of a drag on the market. Until such time as the major banks and Telstra can demonstrate revenue growth of more than a few percentage points, the market will look elsewhere for growth. In this environment, midcaps and small cap stocks will remain well bid, more so if commodity prices stay firm.

Apart from investing in some of the stocks directly, managed investment options are also available. On the passive side, both iShares and SPDR have ETFs (exchange traded funds) that track the S&P/ASX Small Ordinaries Index. The former trades on the ASX under stock code ISO, while SPDR’s trades under SSO.

VanEck has recently transformed one of its ETFs to track the Midcap 50 Index. The VanEck Vectors S&P/ASX Midcap ETF trades under stock code MVE.

Actively managed investments include Investors’ Mutual Australian Smaller Companies Fund, Eley Griffiths Small Companies Fund, Spheria Australian Smaller Companies Funds and a plethora of listed investment companies such as QV Equities (QVE), WAM Capital (WAM) and Perpetual Equity Investment Company (PIC).

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Published: Thursday, November 02, 2017


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