If over the years I had banked a dollar every time someone told me that Australian shares were a sure bet to outperform global shares, I would be able to retire much earlier. While it’s true Australian shares have outperformed global shares in many years, in 2014 our Australian share market’s was relatively modest compared to a number of its global peers.
In the year to 31 December 2014, Australia’s S&P/ASX 200 Price Index (which takes into account just share price movements) returned only 1.1 per cent. However, the S&P/ASX 200 Accumulation Index, a ‘total return’ index that includes both share price movements and dividends, increased by 5.6 per cent (dividends to the rescue again).
While this year’s total return was significantly under the total returns of 20.2 per cent in 2013 and 20.3 per cent in 2012, it does compare favourably to the total return of some offshore market indices such as the UK’s FTSE 100 (-2.7 per cent), France’s CAC 40 (-0.5 per cent) and Germany’s DAX (2.7 per cent). On the other hand, it fell short of America’s S&P 500 (11.4 per cent total return) and Japan’s Nikkei (7.1 per cent).
The key to capturing or doing better than this year’s market return was to favour industrials and avoid resource and energy stocks. The ASX200 Industrials Accumulation Index increased by 11.4 per cent but the ASX200 Resources Accumulation Index lost ground, returning -16.4 per cent. The 47 per cent drop in the price of iron ore was the main reason for the resource market’s poor return. Iron ore’s price fall was due to events in China where declining economic growth, construction activity and steel demand coincided with a rise in supply. Bulk commodity producers weakened, including BHP Billiton (whose price fell 22.7 per cent), Rio Tinto (-14.9 per cent) and Fortescue Metals Group (-52.9 per cent). The price of oil also fell by 48 per cent in 2014, leading to share price weakness of energy majors such as Santos (-43.6 per cent), Woodside Petroleum (-2.3 per cent) and Oil Search (-2.7 per cent).
The superior performance of industrial stocks was by no means widespread. Consumer oriented sectors struggled, such as Consumer Discretionary (-0.9 per cent) and Consumer Staples (-4.6 per cent), because weak consumer sentiment made for a difficult retail trading environment. Retailers exposed to discretionary spending performed the worst. Myer’s share price fell 49 per cent in 2014 while JB Hi-Fi (-26.6 per cent) and Flight Centre (-31.4 per cent) also performed poorly. Retailers of consumer staples such as Woolworths (-9.4 per cent) and Wesfarmers (-5.0 per cent) also underperformed the broader market.
The sectors posting the highest returns were those who benefitted from the lower Australian dollar or offered sustainable dividends and an attractive dividend yield compared to bonds and term deposits. The S&P/ASX 200 Health Care Index increased 24.4 per cent as some companies, such as CSL (25.7 per cent), were expected to benefit from the favourable profit impact of the lower Australian dollar.
An average distribution yield of more than 5 per cent helped the S&P/ASX 200 Australian Real Estate Investment Trust Index record a return of 27.0 per cent, the highest sector return in the market in 2014. Other beneficiaries of the preference for stocks with an attractive dividend profile were Telstra (13.7 per cent) and infrastructure players Sydney Airport (24 per cent) and toll road owner Transurban (27.2 per cent).
While the four largest banks continue to provide attractive dividend yields to investors, their share price performance was held back due to valuation concerns and fears late in the year that the Financial System Inquiry may recommend they be required to maintain a higher capital buffer. The share prices of Commonwealth Bank (10.1 per cent) and Westpac (2.4 per cent) advanced, while those of ANZ and National Australia Bank lost ground (falling 0.4 per cent and 3.5 per cent respectively).
