Which sectors provide more certainty of earnings in the present environment?
The traditional defensive sectors being REITs, Utilities, and Healthcare generally exhibit low earnings sensitivity to economic conditions. Accordingly, in this period of economic weakness where Australian GDP estimates have been revised down from 3% to 2% or less and with consumer confidence at multi-year lows, one would expect these sectors to perform relatively well. In the main, this is happening with the S&P/ASX 200 REIT index outperforming the S&P/ASX 200 by 6% post reporting period (and 9% calendar ytd), the Utilities index outperforming by 9% (and 14%), and the Healthcare index outperforming by 4% (and 9%). That said, we believe it is foolish to slavishly “buy a sector” without analyzing the underlying characteristics and valuations of the constituents. Having done this exercise, we do see pockets of attractive value within the REIT sector (some providing yield spreads to Commonwealth 10 year bonds of 3-4% with defensive growth potential), but see many Utilities as highly geared with some regulatory risk. Certain of the healthcare stocks such as RHC just look too excessively priced to warrant portfolio inclusion (PE premiums of 60-70%).
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