ASX Leaders to June 2020

Bear markets are like bushfires in the outback; they make way for new life. On the ASX, the COVID-19 bear market has created new leaders on the ASX. At this stage of the market cycle these leaders are still changing places rapidly.

Last month we had heath care companies, grocers and medical suppliers as the leaders. This month the market has adjusted course so that the leading companies into June 2020 have these leading thematics:

1) Small-Cap companies:

The smaller companies have performed better than the large end of town.

The larger companies on the ASX are dominated by banks and insurers, as well as some mining.

While the banking shares have cut or deferred dividends their share prices have wallowed, until late in the month. This stalling of bank performance has been enough to see the larger end of the market struggling to keep pace with the smaller companies.

While the smaller companies also fell more in March, they are still better off than the large-caps including for the last 12 months.

2) Hedged foreign exchange exposure:

Companies that had hedged exposure to the USD, or their respective markets, have performed better than those with full foreign exchange exposure.

The simplest example are Exchange Traded Funds (ETFs) that have the exact same portfolio of shares but differ in foreign exchange exposure. Those that are hedged performed better.

This is of little surprise as this always happens when the AUD increases against the USD. If you roll back the clock a few months, you’ll see the reverse, where unhedged companies performed better as the AUD fell.

3) Factor Investing Thematics

Fund managers and ETFs that focus on momentum as an investment strategy have generally performed better than the more vanilla fund managers.

Factor Investing can cover size, value, growth, momentum and profitability etc. In this market, the momentum companies have provided the best returns from the March lows.

Other leading aspects of the market are:

4) Global shares - partly due to FX and AUD moves

5) Segment specific fund managers and ETFs – similar reasons to the small caps

6) Thematic Investing – specific to momentum focused funds

7) Green companies and Environment Sustainable and Governance (ESG) focused funds.

This theme is the most interesting because there is a hypothesis that the Governance focus of companies is polarising those that are looking after their workers in this pandemic, against those chasing short term targets and using the crisis as a reason to cut costs.

The theory is that companies that look after their employees have a superior working culture which promotes more innovation, efficiencies, and growth. If this is the case, then long term investors will be rewarded with higher share prices.