Hitched to a financial star

Once again, it is the financials sector pulling the Australian market higher. The performance of one sector or company has the ability to alter investors’ perception of market conditions.

Google solely managed to lift the US-based S&P 500 to all-time highs in trade on Friday as it gained a staggering 13.77 per cent. With a market capitalisation of $US337 billion and as the third-largest company listed in the US, it can easily distort the performance of its benchmark index. Despite Google’s staggering one-day returns, the S&P 500 only managed to gain 0.65 per cent. 

Domestically, the recent performance of the financials sector can largely be explained by three of the big four reporting in the next three weeks. Generally speaking, the pattern of the big four is to rally hard leading into full-year results, then lose steam once the dividend is paid.

While the Bank of Queensland has had a stellar performance, gaining over 10 per cent since registering impressive results earlier this month, it only accounts for 0.6 per cent of the financials sector. Of the big four National Australian Bank is leading the way, having gained 5.3 per cent in the past three weeks alone.

Since the start of October the financials index all up has gained 4.17 per cent. The next best sector is consumer discretionary, only chipping in a gain of 2.74 per cent to just nudge out the benchmark ASX 200 index, which gained 2.6 per cent over the same time.

As the financials index makes up over 45 per cent of the ASX 200, what happens across this sector carries great weight in influencing how investors feel about the market in general. It hasn’t always been this way – as recently as the start of 2011 financials only made up 37 per cent of the index.

It is becoming increasingly important to pay attention to how individual sectors of the index are performing for a better-rounded take on conditions in the broader market.

Energy comes in as the worst performing sector since the start of October, having only gained a measly 0.17 per cent. The flat performance of the sector has been driven by a falling oil price and rising exchange rate. All up, the energy sector only accounts for 6 per cent of the broader index value.

While the market in general has strengthened during October, it hasn’t been evenly shared among the different sectors. At the moment, much of the market performance is attributable to financials, anchored by the big four banks.