By Paul Rickard

One of the big standouts of the lethargic performance of the Australian sharemarket in recent times has been the underperformance of the large cap stocks. Banks have been on the nose, the supermarket wars have taken their toll on our major retailers, and until very recently, resource companies were being decimated due to the collapse in commodity prices.

The top 20 stocks account for almost 50% by market capitalisation of the ASX, so when they are going backwards, it is hard for the overall market to go up. And they have been struggling.

In the year to the end of March, the top 20 stocks returned (including dividends) -16.34%. This compares to the overall market’s return of -9.59%, an underperformance of almost 7%. So far in 2016, the overall market is close to flat at -0.19% (including dividends), while the top 20 still lags at -3.42%.

Going back in time, the returns are, as you would probably expect, more closely aligned. Over the 5 years to end March, they are about the same, while over 10 years, the top 20 has outperformed with a return of 5.29% pa compared to the S&P/ASX 200 return of 4.43% pa.

The Top 20 in detail 

The table below shows the top 20 stocks in descending order of market capitaliastion, and their total return (including dividends) in 2016. Although 10 stocks have positive returns and 10 stocks have negative returns, the biggest 5 stocks are negative. The largest stock, Commonwealth Bank, which accounts for more than 9% of the S&P/ASX 200 index, is down over 10%, while fourth placed ANZ has lost 14.4% this year. 

* Value of CYBG demerger

With the oil price stabilizing around US$40 a barrel and iron ore surging through US$60 a tonne, BHP and Rio have had strong rallies over the last two weeks. Rio is now up 18.1% this year, while BHP has added 15.1%. Oil and gas producer Woodside hasn’t done as well as some of the other energy stocks like Santos or Oil Search, and with the price of LNG still under pressure, is down almost 6%.

Of the retailers, Wesfarmers continues to outperform Woolworths, although both are being squeezed on margin due to competition from Aldi, Costco and IAG. Interestingly, defensive stocks such as toll road operator Transurban and shopping centre owner Scentre have performed strongly.

The other real standout is that one of last year’s best performing stocks, Macquarie, is the worst performing top 20 stock this year, down 20.0%. Macquarie got hit hard in January/February when concerns about the outlook for global growth sent equity markets into a downward spiral. Facing a potential revenue crunch in its investment banking and funds management businesses, Macquarie shares touched a low of $58.28.  Although it has bounced back into the mid 60s as global equity markets have recovered, the market has been slow to rerate Macquarie. Certainly, a stock to add to the buy list.

Can the Aussie market retest last year’s high?

While the US markets are now not that far off the highs they touched last year, the Aussie market at 5,216 has a long way to go to challenge the 6,000 level that it got so very close to in March 2015. And I don’t think it can get there unless the top 20 start to outperform, which I believe will require 3 preconditions to be in place.

Firstly, and this may already be in place, commodity prices need to bottom. They don’t necessarily need to rise, however the market has to believe that the worst is behind and that there aren’t producers or companies servicing the mining industry in danger of collapse. As the last few months have demonstrated, this fear has had an enormous impact on financial stocks around the globe, including our banks. 

Next, we need to “love our banks”. Not literally of course, but I am sure you know what I mean. Stable commodity prices will help, but the market getting confidence that bad debts are under control and that there isn’t a risk of a major deterioration is key to investor sentiment. We will get a good feel for how the banks are travelling when the half yearly reporting season kicks off in a fortnight. Westpac leads the procession on Monday 2 May, followed by the ANZ on Tuesday 3 May and NAB on Thursday 5 May.

Finally, the Aussie dollar needs to stay down to help the economy keep growing, otherwise some of our large cap companies will find delivering top line growth pretty difficult.

If these preconditions occur, then our top 20 stocks can lead the market higher.