I think the ASX200 (ASX: XJO) is going to struggle for the rest of this year and in 2020.
In FY19 the ASX200 delivered a return of over 10% including dividends, and in the six months to June 2019 it produced a return of almost 20%. That has been great for index investors who own attractive ASX exchange-traded funds (ETFs) like Vanguard Australian Share ETF (ASX: VAS) and BetaShares Australia 200 ETF (ASX: A200).
But, looking at the next 12 to 18 months, I think the ASX200 could face a tough time.
When you look at the top performers of the ASX200, it’s unlikely to be repeated. The share prices and dividends of BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have done very well from high commodity prices. But over the past month we have seen a weakening of their share prices and once Brazilian Vale resumes full production of iron ore there could be lower commodity prices.
Macquarie Group Ltd (ASX: MQG) has been a top performer over the past few years, but it’s predicting that profit may decline in FY20, so I don’t expect the share price to be able to edge much higher.
The Telstra Corporation Ltd (ASX: TLS) share price has been a stunner in 2019, but profit fell in FY19 and management said that the company is only halfway through the NBN pain. More profit falls could lead to a lower share price, or at least not a rising share price.
The big four ASX banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) benefited from a positive end to the royal commission, the RBA cutting interest rates and APRA shifting its interest rate buffer lending policy. These one-off boosts won’t be repeated.
So, what I’m getting at is that most of the top ASX shares have been boosted this year, but over the next year they can’t benefit again and may indeed drop back a bit from the highs we’re seeing.
How can we take advantage of blue chips not doing so well? I think the key is investing in growing businesses at attractive PEG ratios or another form of attractive valuation. They may be higher-risk, but if you do well with six out of ten picks, your portfolio should outperform the index as whole.
Some names that spring to my mind are Webjet Limited (ASX: WEB), MNF Group Ltd (ASX: MNF), Citadel Group Ltd (ASX: CGL), Duxton Water Ltd (ASX: D2O), Class Ltd (ASX: CL1), A2 Milk Company Ltd (ASX: A2M), Bubs Australia Ltd (ASX: BUB), Reliance Worldwide Corporation Ltd (ASX: RWC), InvoCare Limited (ASX: IVC) and Bingo Industries Ltd (ASX: BIN).
I wouldn’t expect every one of the above ideas to beat the market to 31 December 2020, but to beat the market you need to do things different to most other investors and investing in smaller unloved yet growing businesses at the current lower share prices could be the way to do it with a portfolio of these types of picks.
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Tristan Harrison owns shares of DUXTON FPO and InvoCare Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of MNF Group Limited and Reliance Worldwide Limited. The Motley Fool Australia owns shares of A2 Milk and Class Limited. The Motley Fool Australia has recommended BUBS AUST FPO, Citadel Group Ltd, DUXTON FPO, InvoCare Limited, MNF Group Limited, Reliance Worldwide Limited, and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.