As the Australian stock market celebrates record highs in 2024, it’s important to remember that not all sectors participated in the rally. Energy, in particular, ended the year as the worst-performing sector, highlighting the volatility that can accompany sector-specific trends. While past performance isn’t always a reliable predictor, could last year’s underperformers present opportunities for 2025?
2024 Sector Performance: A Mixed Bag
Despite the market’s overall strong performance, three sectors finished the year in the red. Energy took the hardest hit, down 18.83%, largely due to weak oil prices and OPEC’s extended production cuts. Interestingly, while oil prices marginally increased over the year, major energy companies like Woodside Energy (-14.5%), Karoon Energy (-29%), Beach Energy (-10%), and Santos (-6%) struggled. Some of these companies, particularly Woodside, face deeper systemic issues, according to Luke Laretive of Seneca Financial Solutions.
The Materials sector also had a rough year, driven by a slowdown in Chinese economic growth, which impacted demand for key commodities like iron ore and coal. Even lithium, once a darling of the market, fell to multi-year lows. However, Laretive notes that some companies within the sector still performed well, with 64% of stocks outperforming the sector index, though big losses, such as a 51% drop in Mineral Resources, had a more significant impact on the overall performance.
Another surprising underperformer was Consumer Staples, which ended 2024 down 7.5%. While this sector is typically seen as resilient in the face of economic slowdowns, the large market caps of companies like Woolworths and Coles had a disproportionate effect on the sector’s overall performance. Both companies experienced volatility, particularly due to ongoing court cases related to allegations of price-gouging.
Looking Ahead: Are Last Year’s Laggards Worth Considering in 2025?
Despite the underperformance of certain sectors in 2024, Laretive cautions against investing based solely on sector trends. He emphasizes that the true opportunity lies in individual stocks with solid fundamentals. “The devil (and the dough) is in the detail,” Laretive says, advising investors to focus on the specifics of each company rather than making sweeping sector-wide decisions.
That said, Laretive sees potential in the resources and energy sectors for investors who are willing to take a counter-cyclical approach. The past year saw significant declines in the prices of commodities like iron ore and coal, but Laretive notes that these types of price drops historically lead to strong recoveries in the subsequent 12 to 24 months.
For those looking at the energy and materials sectors, Laretive suggests focusing on companies that have made strategic investments during tough times. For instance, in the coal sector, Stanmore Resources (ASX: SMR) and New Hope Group (ASX: NHC) are viewed as solid picks based on their careful management and long-term strategies.
In the energy space, Laretive highlights Karoon Energy (ASX: KAR) as an interesting prospect. Despite its history of production instability, the stock is currently valued at a very attractive price, with improving production stability and strong cash flow prospects. The company is also supported by a share buyback program, which adds to its appeal.
The 2025 Theme: Mergers & Acquisitions
Looking ahead, Laretive anticipates mergers and acquisitions (M&A) as a major theme for the first half of 2025, particularly in the resources sector. He predicts that companies like Wildcat (ASX: WC8) in lithium and Antipa Minerals (ASX: AZYN) in gold will attract bids from larger players, offering potential opportunities for investors.
Conclusion: Patience and Fundamentals Will Guide 2025
While 2024 may have been a challenging year for certain sectors like energy, materials, and consumer staples, Laretive advises investors to remain focused on the fundamentals of individual companies rather than relying solely on sector performance. For those with the patience to ride out potential short-term volatility, the counter-cyclical nature of sectors like energy and resources could provide significant opportunities in the coming year. As always, the key will be identifying well-managed companies that are positioned to weather market fluctuations and emerge stronger in the long term.
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