The Capital Club Daily: Why the outlook for ASX blue chips looks decidedly bleak

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What’s the big deal?

The AFR says L1 Capital fund manager Mark Landau is finding it very hard to find any ASX blue chip stocks worth buying.

He says the companies in the ASX 20 are largely not growing, including the big four banks, Telstra Corporation (ASX:TLS), Woolworths (ASX:WOW) and Wesfarmers (ASX:WES).

His assessment of the banks was particularly harsh, saying they face “all sorts of pain in the next few years.”

What does this mean?

The Capital Club largely agrees with Mr Landau that future returns for many of the popular ASX blue chips will be mediocre.

How bad?

UBS analysts told a Sydney audience on Thursday that given current stock market valuations, history suggested investors should expect returns of 3.1 per cent a year (on average) over the next 10 years.

That’s not much more than what you can earn in a term deposit.

What should you do?

Diversify.

If you’ve got too much of your portfolio in Commonwealth Bank of Australia (ASX:CBA) and/or Westpac Banking Corp (ASX:WBC), consider diversifying into other companies or funds.

For ASX 200 stocks to buy, the Ellerston Australian Share Fund has recently added to its existing positions in five companies.

For smaller companies, the Spheria Australian Microcap Fund has named two companies trading on what look like insanely cheap valuations. One of them even trades on a 9.3 per cent fully franked dividend yield.

A portfolio should hold up to 20 individual company names, and be diversified across sectors. Having 60 per cent of your portfolio in the big four banks doesn’t count as diversified.

On the flipside, you can be too diversified. Holding 100 companies is too many. Holding 20 funds — which in turn each hold around 50 companies — is too many.

Cut your losers. Reinvest in your winners. Add new positions, over time.

I’m gunning for around 10-12 per cent per annum returns (on average) over the long-term. You should too.

But sitting in the popular ASX blue chips isn’t going to get you over the line, no matter how juicy the fully franked dividends.

Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au