Given the level of uncertainty in the market, investors have allocated equity to defensive sectors, but as a result are missing opportunities in other places, says State Street Global Advisors.
According to a State Street Global Advisors' (SSgA) report on Australian equities, investors have sought out sectors which are less exposed to economic cycles.
The report argued that while it is important to hold assets in defensive sectors like utilities, investors need to be cautious that they aren’t missing out on opportunities in “unexpected” market areas.
The report authors, SSgA head of active quantitative equities, Asia Pacific, Olivia Engel and senior portfolio manager Toby Warburton, said investors need to strike a balance between return expectations and reducing risk.
“We believe by searching in the more hidden corners of the market we can find stocks that strike this right balance, and help diversify the portfolio away from the financials and resources dominance of the market as a whole,” Ms Engel and Mr Warburton said.
SSgA indicated that the consumer discretionary sector – which accounts for 19 per cent of the S&P/ASX 300 Index – should be looked at by investors focused on managing tracking error against the index.
The consumer discretionary sector is made up of three industry groups: media companies, retailers and consumer services stocks.
“In terms of P/E ratio, the sector looks relatively cheap, however earnings have held up relatively well over the past financial year,” the report said.
“With reasonable earnings profiles, and relatively cheap valuations, we believe there are some interesting investment opportunities amongst the lower risk names in the sector."
According to Ms Engel and Mr Warburton, the sector has recorded a performance roughly matching that of the broader index over the past year.
SSgA suggested media companies be avoided due to their exposure to the economic and advertising cycle – these companies have also performed relatively poorly over the past year.
“We believe the heightened volatility in these names makes them less attractive investments than some of the consumer services and even retail names,” the authors said.
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