Slump in key Aussie stocks hit largely overall index

The downgrades in 2023 in Australian company earnings across key sectors, such as financial and material stocks, have further exacerbated the already high level of concentration of local benchmarks, and placed the Australian market in opposition to global indexes which have benefited largely from concentration in the mega caps technology and discretionary sectors.

The Australian market, as evidenced by the S&P ASX 300, has seen earnings downgrade of -7.2% in 2023, heavily influenced by the top 10 index weights, in contrast to the MSCI World Index which was helped by small upward revisions of +3.7% by its top 10 mega cap names.

Bruce Apted, Head of Portfolio Management Australia at State Street Global Advisors (SSGA), noted that while much has been written about the concentrated nature of the MSCI World,  it was now time to take a closer look at equally concentrated Australian market.

According to the SSSA data, the top 10 names in Australia make up 46% of the S&P ASX 300 Index while the top in the MSCI World only account for 21% of the market, making the Aussie benchmark more than twice as concentrated as the MSCI World Index.

“Moreover, this comes at a time when the MSCI World is more concentrated than it has been for at least the last three decades. The extent of the Australian concentration is further exacerbated by the lack of sector diversification across the 10 largest securities,” Apted noted.

Commenting further on the MSCI World Index, he said that dominance of the mage caps in the US, which saw positive earnings revision across technology, communication services and consumer discretionary sectors, helped hide “many of more negative trends” occurring across the rest of the index.

“Australian equity market has seen a negative earnings trend in 2023. The majority of this negative earnings trend is attributed to the concentrated weight in the domestic Banks and the Materials sector which have seen negative revisions this year. This highlights why a diversified, active and benchmark unaware approach has more relevance in the forward environment in Australia,” Apted added.

“Regardless of your geographic equity preferences, in an environment where the risks are rising it is important to have a bias to quality and a decent exposure to defensive sectors which demonstrate more resilience in volatile equity markets as we approach 2024.”