• Christopher Hall

Blue-Chip Blues – Investors’ Questions Answered


Australian Blue-Chip shares have underperformed the rest of the market – a lot. Just look at the last three years to see:

Blue Chips -3%

Midcaps +40%

Emerging Companies + 55%

This week’s Investor question asked why the Blue-Chips have underperformed so much.

* The above chart shows the performance of Blue-Chip shares (red), Mid-Cap shares (Blue) and Emerging Companies Index (Green) over the last three years.

The answer is a combination of:

  • Post-GFC;

  • Lower interest rates for longer;

  • Australia playing a Tech catch-up game

Firstly, we should identify what Blue-Chips, Mid-Caps and Emerging Companies are:

Blue-Chips

The largest companies on the Australian share market.

Think Commonwealth Bank (CBA), BHP (BHP), Telstra (TLS), Woolworths (WOW) and QBE (QBE).

Mid-Caps

The companies you wish you bought five years ago:

Domino’s Pizza (DMP). A2 Milk (A2M), CarSales.com (CAR), Cochlear (COH), RealEstate.com (REA).

Emerging Companies

You know the headlines driving the share prices higher, but are less likely to know the companies itself.

Think of:

  • Technology companies promising to be the next Atlassian (Appen (APX), BIG Un (BIG) etc)

  • Demand for batteries in electric vehicles driving mineral prices higher (Lithium, Cobalt, Nickel);

What’s behind the Blue-Chip Blues?

You can never directly link cause and effect because the share market is a cauldron of information, ideas and opinions.

Let's look however, at three plausible reasons behind the Australian Blue-Chip Blues:

Post-GFC Hangover:

Late 2007 to Early 2009 were not a lot of fun for investors; the Australian Share market fell around -50% (XJO of ~6,800 to ~3,100).

Shares were not a popular Christmas present for the next few years, let alone investor’s capital.

This influenced a mass selling of shares and a huge uptake of term deposits.

Term Deposits (TD) were paying around 7% for a 5-year TD.

If you were:

  • Early to sell your shares, say 2008; and

  • Late to move into a term deposit, say 2009; or

  • Average, somewhere in-between early and late

then your 5-year Term Deposit expired 2013-2014. You were then cashed up, but gun-shy of the Australian share market.

Lower Interest Rates, For Longer

While you’ve been invested in TDs, the 5-year TD rate has dropped from 7% to a paltry 2.5%.

Now you need a better return, and the Blue-chip shares look attractive, paying dividends of 5%+ Franking credits - even higher if you shop around.

So, you, and everyone else in the same boat, buy blue-chip shares.

Blue-chip shares are now going up in price – fast – in what I called at the time ‘Domestic Dividend Dash’.

So, you buy more blue-chip shares, and so does everyone else.

Now, almost every dividend paying share from BHP, CBA, TLS to Toll road operators, utilities providers are all paying dividends of 4.5%.

The Domestic Dividend Dash culminated in May 2015 when ANZ Bank (ANZ), National Australia Bank (NAB) and Westpac (WBC), flagship dividend payers, payed out dividends (known as trading ‘ex-dividend’).

While the climax was in May 2015, CBA had already lost the ‘Market Darling’ title to the likes of Bellamy’s (BAL), Blackmores (BKL) and DMP, which all sky-rocketed in 2014. This is when the Blue-Chip Blues started, although most investors will tell you it was at the peak of the share price (May 2015).

Australia Playing a Tech Catch-up game

Australian blue-chips performed well over this time, although this performance was dwarfed by the US markets’ performance - think of the FAANG Stocks (Facebook, Amazon, Apple, Netflix and Google).

When it comes to Tech stocks, the Australian share market is notably deficient.

However, Tech stocks as a percentage of the Australian market (XJO) have doubled over the last 10 years, but still only 2.5% today.

Australia has definitely lifted its Tech-game, although which companies are these?

Everyone thinks of REA and CAR, and the former AU-Tech-Heavyweight Computershare (CPU).

The other Tech leaders are Wisetech Global (WTC), Link Admin (LNK) and MYOB Group (MYO) – all three were listed on the ASX within the last three years.

Why is the Emerging Companies Index up +55%?

The stronger performance of the Emerging Companies index (XEC) has the themes we love, fuelled by the names we don’t know – the up and coming names.

There are dozens of phenomenal Australian innovators in the smaller Tech rankings, and this is where the real kicker comes from.

The XEC strength is partly attributed to these prominent Tech companies, commanding a 20% weighting of the index.

Add in the exposure to the strong Mining themes (23% weighting) and leading Fin-Techs which bridge the gap between Australia’s dominant Financials and global-growth Tech (up to 11.5%), we can see that the XEC more closely resembles the international market place.

Conclusion

The Australian Blue-Chip Blues are a function of the top-heavy, dividend-proxies, rather than global-growth opportunities - a summary of the domestic-centric ASX (XJO).

In contrast, the Emerging Companies index (XEC) has out-performed because it is a closer proxy to the global growth drivers which are powering the global markets higher.


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