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It’s time for a benchmark unaware approach: State Street

By Jessica Penny
4 minute read

A sector earnings decline has uncovered a weakness in Australia’s top-heavy market, a portfolio manager says.

The Australian market has seen earnings downgrades of 7.2 per cent this year, with recent data from State Street Global Advisors pointing to the S&P ASX 300’s heaviest weights as the culprit.

The downgrades in financial and material stocks have had a large impact on the overall index due to the highly concentrated nature of the benchmark, the financial services firm has shown.

Comparatively, the MSCI World Index saw a small upward revision of 3.7 per cent in 2023, similarly driven by its 10 largest caps.


While there has been considerable discussion about the concentration in the MSCI World Index, less attention has been given to the even more concentrated nature of the Australian market, according to State Street’s Australian head of portfolio management, active quantitative equity, Bruce Apted.

Namely, the top 10 mega caps in Australia constitute almost half (46.7 per cent) of the S&P ASX 300 Index, while the top 10 in the MSCI World only account for 21 per cent of the market.

BHP Group currently holds the heaviest index weight in the S&P ASX 300, at 11.2 per cent, whereas Apple, being the heaviest in the MSCI World, only holds an index weight of 5.25 per cent.

“On this measure, the Australian benchmark is more than twice as concentrated than the MSCI World,” Mr Apted noted.

This comes at a time when the MSCI World is already more concentrated than it has been for at least the last three decades, he added.

Meanwhile, the lack of sector diversification across the S&P ASX 300’s largest securities is exacerbating the Australian markets concentration, with financials and materials dominating the index.

In other words, the index may be well placed when financials and materials perform well but is equally susceptible to facing headwinds when Australian large caps do too.

“In contrast, the mega caps in the US have seen significantly positive earnings revision especially in technology, communication services, and consumer discretionary,” Mr Apted added.

“The dominance of the mega caps has hidden many of the more negative trends which have been occurring across the rest of the index.”

In comparing trends across sectors for both the MSCI World Index and for the S&P ASX 300 Index, the theme of negative earnings per share (EPS) this year to date (YTD) for financials, materials and energy have been consistent in both Australia and in the developed markets, State Street data revealed.

Specifically, financials, materials and energy have a cumulative weight of 58.61 per cent within the S&P ASX 300 but have shown a YTD EPS loss of 6.6 per cent, 8.2 per cent and 34.2 per cent, respectively.

This was against strong EPS revisions for developed markets across communications, discretionary and technology.

“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,” Mr Apted said.

The current Australian market, he added, should then favour a preference for a diversified, active and benchmark unaware approach.

Comparatively, Mr Apted noted that returns from the MSCI World have benefited from concentration in the mega cap technology and discretionary sectors.

“Regardless of your geographic equity preferences, in an environment where the risks are rising, it’s 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,” he concluded.

It’s time for a benchmark unaware approach: State Street

A sector earnings decline has uncovered a weakness in Australia’s top-heavy market, a portfolio manager says.

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