50% of the ASX is banks and miners. Should you bet against the market?

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today, we're going to be taking a look beyond the boring banks and miners for a little bit of growth for your portfolio. To do that, we're joined by James Gerrish from Market Matters and Henry Jennings from Marcus Today.

Henry Jennings: Ally, there's a huge amount of risk in that, and we're seeing it. Commonwealth Bank (ASX: CBA) is now the biggest component of the ASX. It's also the most expensive bank in the world. It's just gone from strength to strength. It has been extraordinary. So there is this problem, and we've seen it in the US with Nvidia (NASDAQ: NVDA) and other stocks like that, is that the popularity of these things drives them possibly beyond their rational valuation, but it doesn't really stop them going higher and higher. So there is inherently a problem because at some stage, the index funds and the ETFs just keep piling in and piling in and it just becomes self-perpetuating. So when it bursts for whatever reason, it can be quite violent and can upset a lot of investors.

Ally Selby: Over to you, James. Do you think CBA is the best bank in the world, as Henry suggested there? And is there any problem with having a super-concentrated market?

James Gerrish: Well, the market's always right, so you waste a lot of money trying to fight the market. That would be the first thing I'd say. We are as concentrated as the US, probably more so. 30% of the S&P 500 is made up of seven stocks. So that is a very, very concentrated mix. We're a little bit more broad than that. Ours are, as Henry had made mention of, financials and resources. That in itself, if I was sitting back and thinking about risk to an index, obviously the edgy technology companies being such a dominant player in the US probably creates a little bit more risk than what we're seeing in our market.

Ally Selby: But ours are far more cyclical.

James Gerrish: They are. They've got different drivers of their earnings, perhaps, would be one way of saying that. Banks are very economically exposed. There's no two ways about that. It's about lending money and then collecting that money back and making a margin in between, so if the economy starts to improve or doesn't splutter like perhaps a lot of people are expecting, then banks will stay well-supported. I don't think the banks are a huge risk at the moment. I think the sector up 30% is pretty eye-watering in a short amount of time, but there are probably some reasons for that. So, it's a risk, but markets are all about risk and managing that risk. It doesn't mean your portfolio has to have such a dominant position in those sectors.

Will we see a Great Rotation on the ASX? 

Ally Selby: We've seen this Great Rotation, or everyone talking about this Great Rotation in the US. Do you feel like we could see that also happen in Australia?

James Gerrish: So if we're talking about the rotation out of large caps into smaller cap companies, yes, it can happen in Australia. I think that the one thing I'd flag is that the composition of the mid-cap and small-cap industries in the US is slightly different. So they're dominated by economically-exposed industrial companies. The Russell 2000 is 20% industrials. They've got healthcare and real estate, etc, up the top of the pile. Ours is dominated by resource stock.

So yes, it can happen. I think it can happen because of one commonality around the cost of capital. So if the cost of capital comes down, these smaller companies require more capital to grow. That's a commonality across the two, but I think you've got to be a little bit careful around not just extrapolating what's playing out in the US, and saying we're going to mirror that here in Australia.

Ally Selby: Henry, do you think the cost of capital can come down?

Henry Jennings: I think the RBA would be pretty foolish to do anything, to be honest. I mean, there's an old Yorkshireman's expression, "If in doubt, do nowt," and I think that that kind of sums it up really for the RBA. There are no marks here in crashing the economy. They can see things are slowing. We know things are slowing down. So that's maybe anecdotal, but we're now starting to see it in some of the numbers coming up in the CPI. So I don't think we're going to get a rate rise, I don't think we're going to get a rate cut anytime soon. It's going to be on hold for longer.

Ally Selby: How are you positioned though? Are you overweight or underweight the banks? And how are you positioned with the miners as well? Are you overweight or underweight compared to the index?

Henry Jennings: I think it's very difficult to be underweight the banks because they're such a massive part of our index. It's called the widow maker trade for a reason. So unless you've got a compelling reason to be underweight the banks, I think you just have to [own them]. The market weight feels like underweight. You're not taking a big bet. They are, after all, building societies. I mean, they're pretty stable earnings. They're not growth companies. They find it very hard to grow. It's not impossible for them to grow at big rates, but politically, you don't want to put a big target on your back and say, "Hey, we're making a fortune out of everybody." They do it kind of slowly and by stealth. So I think neutral in the banks. Miners, I am underweight at the moment, but looking at some stage for that rotation to happen.

Ally Selby: Over to you, James. Are you underweight or overweight the banks and miners right now?

James Gerrish: So for banks, it depends on the portfolio. The income-focused portfolio is pretty much in line with market weight, plus we've got some exposure through hybrids and direct bank bonds. In growth portfolios, we are underweight the banks. I don't think you're going to get the growth from here that you can get elsewhere.

Ally Selby: Okay. That was going to be my next question, a theme that you're really excited about for the next 12 months. Do you want to pick out one of those commodities and talk a little bit about it?

Ally Selby: Over to you, Henry. What's a theme that you're really excited about over the next 12 months? Hopefully, it's not copper so we can have a little bit of something different.

Henry Jennings: It's not copper, but I do appreciate the theme, I've got to say. BHP as well, going in buying another copper company recently, not as big as Anglo, but they are making moves again there. So it is a big theme, but I think maybe people got a bit carried away.

Ally Selby: I know before, we talked about not wanting to bet against the market, that the market is always right. I'm going to push you to actually do that though. What's a big miner or a bank that you would rate as a strong sell today, and why?

Henry Jennings: I think James is right, it's very hard to get very bearish on the BHPs (ASX: BHP), the Rios (ASX: RIO), and the Fortescues (ASX: FMG). We've seen Fortescue take a bit of a tumble due to that block trade. I think really at the moment, it's maybe in the oil and gas sector, maybe the likes of Santos (ASX: STO). It still remains problematic. I think there's still question marks over Santos. Woodside (ASX: WDS) doesn't seem to be able to get off the mat either. So if you were going to avoid a sector, I think the oil and gas sector is probably the one that I would avoid, for the time being anyway.

Ally Selby: Over to you, James. What bank or miner would you be selling today?

James Gerrish: I wouldn't be selling miners because I'm bullish in that area. A "sell" is all about price, right? The miners are priced pretty cheaply at the moment. There's not a lot of optimism built in. I think one area that's got a lot of optimism built in is NAB (ASX: NAB). We own NAB, we've still got it. But thinking about that thesis, the business bank is what's driven NAB. NAB is up 34% in the last 12 months, ANZ (ASX: ANZ) is up 11%, and the rest of the banks are up about 30%. One of the jewels in their crown is their business bank. CBA (ASX: CBA) is a huge Goliath in the banking space. They're going hard at business banking. So it's the first time that NAB's had a really serious competitor in the business banking space. So when I think about how we want to position our bank holdings moving forward, then that's coming up on my radar as the one to sell, albeit that we own it, but we may well sell it very soon.

Henry Jennings: Get on that phone quickly.

James Gerrish: Yeah.

Ally Selby: Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube or podcast channels. We're adding so much great content just like this every single week.