MARKETS SPECTATOR: Rotation restraint

Sell in May and go away? Hardly.

The S&P/ASX 200 Index was down just 0.2 per cent between April 30 and May 17. Still, the share prices of ANZ, Commonwealth Bank, NAB and Westpac have fallen 5 per cent, 0.3 per cent, 2.7 per cent and 7.25 per cent respectively during the same period. Many of the bank stocks have gone ex-dividend, depressing their share price performance, but some analysts have also pointed out – most notably at UBS – that the big four's share prices are in “bubble” territory.

That’s worrying for Mr and Mrs Australia. Two-thirds of direct stock investments by Australians are in the banks, according to the Australian Bureau of Statistics. Banks now comprise 31 per cent of the total market value of the S&P/ASX 300 Index. In September 2011 the banks’ market value compared with the index was 25 per cent.

State Street Global Advisors' Olivia Engel says bank valuations "look stretched". But, she says, bank dividend yield – 4.9 per cent on April 30 – make such stocks “attractive” compared to deposit rates and Australian government bond yields. Money flows into bank shares could continue, says Engel, who adds valuations in the sector are not as high as they were in 2006 and 2009.

Engel urges a more balanced portfolio. She says financial stocks and ex-property trusts comprise 13 per cent of a State Street fund The Australian Managed Volatility Alpha Strategy. Consumer staple stocks comprise 14 per cent of the portfolio, property trusts also 14 per cent, industrials 13 per cent, utilities 13 per cent, consumer discretionary 9 per cent, health-care 7 per cent, materials 6 per cent, telecommunications 6 per cent, information technology 3 per cent and energy 2 per cent.

Engel says her portfolio over three years to April 30 produced a return of 15 per cent compared with the 7 per cent gain in the benchmark S&P/ASX 300 Index.