It’s time blue-chip investors take stock

WITH INVESTORS FACING THEIR LOWEST RETURNS IN YEARS FROM THEIR BHP SHARES, IT’S NO WONDER THEY’RE FEELING LOST AND CONFUSED.

The lowering domestic commodity prices, the downturn of the mining boom, and the Chinese economic slowdown are all adding deadweight to these investors’ woes.

In a front page article in The AFR Weekend, 14-15 November 2015, writer Matthew Smith* comments on BHP’s share fall of 10.8 per cent in one week after the Brazilian venture disaster.

He suggests BHP is among the largest and revered companies on the Australian Stock Exchange (ASX) to “have suffered since the market headed south in the March 2015, wiping out the savings of investors who have relied on the so called safety of blue-chip shares.”

Mr Smith writes of “seeing venerable blue chips like Woolworths eclipsed by a new generation of high-quality and more reliable companies.”

Readers of my 09 November blog** on blue chip investors and biases, will remember the advice of those financial analysts: holding on to blue chip shares for sentiment’s sake is a financially risky mindset to indulge.

The financial advisors recommended a review on the ‘return on investment’ rate and the need to take hard decisions if the share return received so far does not match your investment strategy. They stress that holding on to under-performing shares for too long will cost time and money which most investors’ cannot recoup.

In The AFR Weekend article, Mr Smith argues that the ASX 20 – the 20 largest stocks in the Australian share market have declined in value by 17 per cent since March 2015. He suggests this is “…3 per cent steeper than the losses of the broader ASX200 index during that time.”

The companies he nominates outside the top ASX 10 (including those four banks: ANZ, CBA, Westpac and NAB) which are growing are Sydney Airport, Healthcare and Transurban.

According to Mr Smith, the changing market indicates growth in the healthcare and tourism sectors while there is an equal decline in companies within the resources sector and the Australian domestic economy.

Mr Smith says the hardest hit companies this year are the self-managed superannuation fund investors which are known for backing the biggest ASX players for a mix of Australian banking and financial sector shares in their stable of investor offerings.

The AFR Weekend article offers some insights into why the market has changed.

Julian Beaumont of Bennelong Australian Investment Partners is quoted as saying there is a growth conundrum amongst the largest companies because “they seem unwilling to decrease their payout ratios and unwilling to invest for growth.”  He added that the top 20 companies all have features that restrain them for the foreseeable future.

Mr Beaumont addressed the issue by explaining there is “…prudential capital requirements requiring the big four banks to hold more capital, the increasing competition among the supermarket players and the cyclical challenges facing miners and energy companies relating to lower oil and iron ore prices.”

Marcus Hughes of LHC Capital concurs and put forward a blunt explanation. “The banks and miners have taken the brunt of the structural shift in the economy. You’ve got to own business with great prospects. That used to be the top 10 stocks when the world was a rosy place. But that’s not the case now.”

Mr Hughes offered a word of advice.  He said there is a structural shift occurring in the Australian economy with a prolonged effect. This means that valuations “…will depend on company specifics rather than a broader market recovery.”

Michael Gordon of Perpetual Investment acknowledged that many investors have been holding stocks in the top 10 or 20 companies and losing money by doing so.

Paul Taylor of Fidelity Australian Equities is quoted as saying ,”You need to know what companies you own and why you own them now.” He commented that from now on the equities market will probably reward “companies able to grow earnings and produce sustainable dividends.”

Mr Taylor also said that “strong management in markets where growth is harder to come by is worth a premium.” He encouraged investors to look for a company ready to “earn its stripes”.

The sage advice suggested by this AFR Weekend article is that the market is entering a low growth phase where earnings will be a more important ingredient to stock share market performance.

Article uploaded 14 November 2015 with acknowledgments.

* Matthew Smith (2015) ‘Biggest blue chips bring down ASX’, AFR Weekend, www.afr.com, 14-15 November 2015, pp. 1 and 2.

** https://www.fionarothchilds.com/business-intelligence-canberra/blue-chip-investors-are-susceptible-to-cognitive-biases/