ASX shares have been under pressure this year amid soaring inflation and fast-rising interest rates.
While we're not technically there yet, many newer investors are looking at what may be their first bear market unfolding.
Image source: Getty Images
Is bigger safer?
With that in mind, many investors on the hunt for relatively safer ASX shares in a time of broadly falling prices will be running their slide rules over both the smaller and larger end of the market looking for some safety.
Turning to the charts, so far in 2022 the S&P/ASX 20 Index (ASX: XTL) – which contains the 20 largest-cap ASX shares – is down 7.4%
By comparison, the S&P/ASX Small Ordinaries Index (ASX: XSO) – which contains all the companies included in the S&P/ASX 300 aside from those in the S&P/ASX 100 – is down 21.1% year-to-date.
Over the longer term, however, the picture changes.
The ASX 20 is up 17.2% over the past five years compared to a gain of 19.6% posted by the Small Ordinaries.
So, what does that tell us about the relative safety of ASX blue chips in a falling market?
What the experts are saying about ASX shares in a bear market
For some expert insight, we defer to Hugh Dive, chief investment officer at Atlas Funds Management, and Hugh Giddy, senior portfolio manager at IML.
Asked by Livewire whether sticking to the biggest 20 ASX shares was a safer option with a looming bear market, Giddy said, "If you buy a big stock, of course, it's safer in terms of they're probably not going to go bust."
As for whether that's a better option for investors over buying a mid or small-cap stock, Giddy added:
Safety really comes from the franchise of the business, the balance sheet and so on… If you look at Zip Co (ASX: ZIP) and Sezzle (ASX: SZL) and so forth, they would no longer be anywhere near the top 20 because the franchise is not that strong. It's a competitive market. They didn't have the best balance sheet. They certainly didn't have much in the way of earnings. So top 20 doesn't mean safe.
Dive pointed out that historically many ASX shares don't manage to remain in the top 20 list for long:
If you look at the top 20 from 20 years ago, most of them underperformed. AMP (ASX: AMP) is down 90%, NAB (ASX: NAB) is off 10-15%, Lendlease (ASX: LLC) is similar.
I think only three or four companies in that top 20 from 20 years ago have actually outperformed the ASX. A lot of these companies are still around, but they are shadows of their former selves. So simply buying an ASX top 20 stock doesn't mean safety.
Dive added that in times of market dislocation, the biggest ASX shares do "tend to work a bit better in that they have sympathetic bankers and equity holders that can raise money. Smaller companies… are fighting for their corporate lives at the moment."
