The Wulff: It's time to meet the ASX Sectors of the Year

The Wulff is Stockhead’s regular wrestle with the savage heart of ASX-trading as per the free-ranging mind of Bell Direct’s market analyst Grady Wulff.

This episode sees Grady on the scent of the ASX Sectors of 2023.

The Wulff: Sector by Sector

“Inflation, interest rates, China’s economic recovery and geopolitical events have really weighed on the sectors this year,” Grady told Stockhead. “Some for the better and others for worse.”

“As we head into the final month of 2023, it’s time to talk about how some of these ASX Sectors performed throughout the year and look ahead to the outlook for 2024.”

The S&P/ASX 200 Information Technology (XIJ) index

The IT Sector has captured the attention of investors both locally and globally in 2023 after sharp sell-offs in 2022, according to Grady.

“The volatility since the COVID-19 rally for the high growth sector has been a rollercoaster of highs and lows that saw investors pile back into the tech sector this year, mostly driven by the hype around Artificial Intelligence.

“AI has been the term of 2023 given its hyper efficiency nature of delivering operational excellence, however investors need to be aware before backing a company based on saying they are investing in AI vs companies actually making material investments in AI.”

The XIJ Tech index is up circa +27% in 2023 to lead the gains among the 11 sectors with key names making waves this calendar year, according to The Wulff.

“While companies like Life360 (ASX:360) have prevailed through the tech rally – shares up circa +58% in CY23 as the tracking tech firm continues to prove cash flow positivity – others are facing slowing earnings outlook for FY24 including WiseTech Global (ASX:WTC) .

“Investor appetite for high growth stocks has rebounded given the certainty around interest rate peaks, however when investing in the sector it is important to analyse the fundamentals behind the company and whether they have profit on the horizon, a strategic growth outlook and material investment in AI.”

The S&P/ASX 200 Consumer Staples (XSJ) index

Consumer staples stocks have faced some headwinds in 2023 Grady says, despite higher interest rates traditionally favouring companies in this sector as higher costs can be passed on without impacting demand.

“The tailwinds we saw in 2022 have turned to headwinds in 2023 for some key names which is what sparked investors to sell out in 2023, with the sector down 6.5% year-to-date.

“The supermarket giants have remained resilient as they have successfully passed on rising costs and managed debt well while also rewarding investors with consistent dividends, but for other companies like Inghams (ASX:ING), feed cost inflation is hurting margins in the current macro environment which has led to lower earnings outlook and the expectation of consumer demand for chicken to slide as alternative protein prices like beef and lamb decline.

“While this sector is down in 2023, staple names like Woolworths (ASX:WOW) and Costa Group Holdings (ASX:CGC) remain key staple investments within portfolios as shares in these companies are up 5.5% and 13.50% respectively year-to-date.”

S&P/ASX 200 Consumer Discretionary (XDJ) Index

Grady says that ASX Discretionary stocks have surprised the market this year.

“Investors and economists’ alike expected consumer spend in the discretionary space to ease given the 13 interest rate hikes in Australia placing increased pressure on all Aussie hip pockets. However, this certainly hasn’t been the case as until October, retail spend in Australia continued to grow, indicating Aussies kept spending despite the increased cost-of-living pressures.

“The discretionary sector is the second-best performer year-to-date, up 11.66% over the 11 months to December 1.

“JB HiFi (ASX:JBH) is up 13.63% since January 1, as investors responded to key strategic moves made by the company including a key focus on reducing inventory levels, restructuring the group’s capital structure to maximise shareholder returns and bolstering the company’s cash position to weather the economic uncertainty.

“As retail spend has began to slow as per October’s retail sales data from the ABS, we may expect a slight pullback in this sector heading into the new year.”

Financials (XFJ) – Energy (XEC) – Healthcare (XHJ)

“The financials sector has dipped into the red later this year as investors assess increased competition and customer switching between the big banks to get the best rate on offer for both deposits and loans is on the rise.”

And net interest margins peaked during FY23 for the big four, Grady adds.

“Energy stocks have also been the worst performing sector in 2023 primarily due to fluctuations in the price of oil and geopolitical tensions weighing on key commodity outlooks.

“The price of oil has been heavily impacted this year by China’s weaker-than-expected recovery post pandemic and key oil producing nations announcing output cuts to boost the price of the commodity amid escalating geopolitical tensions especially in the Middle East.

“Over the last year, the price of oil is down 3.4% which has weighed on companies including Woodside Energy Group (ASX:WDS), Santos (ASX:STO) and Beach Energy (ASX:BPT) as each of the oil producers’ share prices are down in 2023.”

Overall, Grady says the outlook for ASX Healthcare stocks is positive heading into 2024.

“Valuations of key companies have fallen throughout 2023 despite strong earnings growth potential, key catalysts heading into the new year for some big names including Telix Pharmaceuticals (ASX:TLX) and the prospect of rate cuts on the horizon proving favourable for margin expansion.”

ASX Sectors Year-to-Date

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