SMSF investors should be diversifying away from large cap stocks impacted by the moderate pace of the Australian economy and invest in small or medium caps instead, says the general manager of an advice firm.
Speaking to SMSF Adviser, Henderson Maxwell Private Wealth Management general manager, Tony Davison, said there has been wide-spread dumping of the top ten stocks by overseas investors.
These foreign investors are concerned about Australia's reliance on commodities and that a potential downturn in housing may severely impact banks.
“There have been macro wholesale issues impacting the value of these stocks which has led to weakness,” Mr Davison said.
Until there is a change in the perception of overseas investors regarding the prospects for China, commodities and the Australian housing market, it's unlikely there will be an improvement for these large cap stocks.
“The larger cap end of the spectrum is probably reasonable value ranging to cheap, but in the short term, until we see those catalysts, there’s unlikely to be any significant rebounds in the value of those shares,” Mr Davison said.
SMSF investors may want to look at small or medium companies instead, with the moderate pace of the economy sufficient for a lot of small or medium caps to perform well, he said.
“Small caps had a very [big] impact last year, beating the large cap stocks for the first year in five years.”
Investors need to be selective about the stocks they choose in the current environment, Mr Davison added, with the “current volatility incredibly unforgiving”.
“The things that seem to be doing well [in the small cap space] are some of the discretionary retailers, and I must emphasise ‘some’. Some of the media stocks are also in the right place for a period of consolidation, and in certain areas, some of the health care players are performing particularly well,” he said.
SMSF investors also need to be diversifying into other asset classes as well with the current markets.
“You might look to a blend of alternatives, real estate to small extent and short-dated bonds.”
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