Looking at the gross performance of the Australian market over the last 5 years, what stands out is the divergence in performance between the two key components in the main index, Financials and Resources.

The chart below shows the 5 year gross performance of 3 key indices: the ASX200 Accumulation index (in red), the ASX200 Financials Accumulation Index (in green) and the ASX200 Resources Accumulation Index (in blue). This 5 year performance period runs from March 2008, some 6 months prior to the dramatic falls of the GFC, to March 2013.

Please click on the above image to enlarge

Over the last 5 years, while the total market has returned 9%, Financials have returned 32% and Resources have returned negative 27%. However, this divergence in performance between Financials and Resources has been a recent phenomenon. For the majority of this period, from March 2008 to August 2011, both sectors moved together. It really was a case of one in all in!

The divergence in performance between Financials and Resources over the last 18 months is marked. In this 18 month period, while the market has returned around 20%, Financials have returned 50% and Resources have had a negative 20%!

There are a number of reasons for this deviation. August 2011 signalled the start of a 40% decline in iron ore prices as concerns over sustainable growth in China emerged. Since that date, and despite a recovery in the iron ore price since, Resources have been volatile, but the clear trend has been a declining one. Australia’s mining sector is particularly sensitive to changes in commodity pricing and sentiment, and both have generally trended down. Resources are near close to their GFC lows again.

At the same time, there has been a global flight to defensive yield stocks. In Australia, the major banks in particular have been viewed as defensive with good sustainable dividend yields. The credit quality of the Banks’ loan books has improved despite a slightly softer economic backdrop, and margins have been stable. Appetite for Australian yield stocks from overseas investors has also been strong.

This rotation from Resources into Financials will likely continue for some time. However, as global growth recovers and volatility abates, Resources could well offer an attractive opportunity at a later date.

Marc Whittaker

Portfolio Manager