SMSFs should look to reduce their overweight exposure to the major banks and telcos, with the strong performance of these stocks in the past four years coming to an end, according to one analyst.
Speaking to SMSF Adviser, Morningstar's head of Australasian equity research, Peter Warnes, said while Morningstar considers the Australian market slightly undervalued and still sees a little value in large-cap companies, SMSF investors should be aware that the “Halcyon days of double-digit returns are well and truly over”.
“Australian equities have had a pretty good run from 2010, and certainly from 2011, and SMSFs from what I’ve seen have been positioned in the right stocks,” said Mr Warnes.
“SMSFs have been income-focused and the yield compression has really helped them. They’ve been in the stocks that really dragged the market up, including the major four banks and Telstra.”
However, Mr Warnes said that with the yield compression story now effectively over, SMSFs should be exposing the growth part of their portfolio to the US dollar, either through offshore companies or investing in Australian companies with an exposure to the strengthening greenback.
Australian companies with US dollar earnings will clearly benefit from the lower Australian dollar, he said.
“The list of companies includes health-care-related Ansell, CSL, ResMed Inc. and Sonic Healthcare,” Mr Warnes said.
“Those from the industrials sector include Brambles, Amcor, James Hardie Industries and Domino's Pizza Enterprises.”
Australia’s financial sector is also in good health, he said, with increasing earnings momentum, solid balance sheets, and growing dividends.
Some headwinds are mounting, however, with “economic growth sub-trend and increasing global uncertainty weighing on investor confidence”, he warned.
Financial companies that will benefit from a lower Australian dollar and a strengthening US dollar include QBE Insurance, Macquarie Group, BT Management, Magellan Financial Group and Henderson Group, he said.
While the major banks continue to benefit from strong competitive advantages underpinning increasing profits and attractive dividends, Mr Warnes believes current SMSF exposure remains too high.
“By definition, I can tell you, given that SMSFs own almost 50 per cent of the four major banks and nearly 50 per cent of Telstra, that they are overweight those five stocks,” he said.
“You have to be careful about overweight situations: I wouldn’t recommend having 40 per cent of my portfolio in banks.”
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