JPMorgan: Australian fund managers retreat from defensive sectors and rotate into cyclicals and resources

Overview

This report tracks sector and stock holding changes by Australian equity fund managers in May 2026. The core conclusion is that fund managers are retreating from defensive sectors such as communications, health care, and consumer staples, and shifting market focus toward cyclicals, resources, and AI capital expenditure-related themes. The strength in the materials sector was driven more by passive following caused by index weight increases and rising share prices than by consistent active buying; meanwhile, changes in property taxation have become the main point of debate for financials and housing-related assets.

Core views

First, the underweighting of defensive sectors looks more like the start of a sustained retreat than a one-month tactical trim. Second, materials and resource stocks have become Australia's main proxy for expressing global AI buildout, electrification, and demand for critical metals, but the true proportion of active capital increasing allocations remains limited. Third, changes to capital gains tax and negative gearing in the federal budget could weaken real estate attractiveness, house prices, and housing turnover, and drag on bank credit growth. Fourth, the Love Index shows capital preference shifting from traditional defensives and safe-haven assets toward some cyclical, insurance, and resource-related stocks.

Analysis framework

The report aggregates monthly sector weights of 55 Australian funds, active weights relative to benchmark, month-end NAV relative performance, disclosed top-five or top-ten holdings, and fund manager commentary. It uses GICS sectors, active weights, the Love Index, days-to-cover, and thematic commentary summaries to identify capital flows and market debates.

Methodology notes

• Sector allocationGICS Active Sector Weight

  Fund sector weight minus benchmark sector weight

  The report tracks the allocation of 55 funds across 11 GICS sectors each month, subtracts each fund's benchmark sector weight from its fund weight to derive sector active weight, and then averages across the sample to judge consensus overweight or underweight positions.

• Stock holdingsLove Index

  Measures stock popularity using concentration in disclosed top holdings

  The report collects the disclosed top-five or top-ten holdings of 55 funds, ranks the top 50 ASX 200 stocks by the number of funds disclosing ownership, and compares this with ASX 200 market-cap ranking to determine whether stocks are well-held, neutral, or under-held.

• Short sentimentdays-to-cover monitoring

  Changes in days-to-cover compared with stock price performance

  The report cross-checks changes in days-to-cover for the top 50 stocks against May share price performance to identify short pressure, covering risk, or shifts in sentiment.

• Theme attributionDebate & Divergence

  Thematic summary of fund manager commentary

  The report distills key debate points from monthly fund manager commentary; this period focuses on capital gains tax/negative gearing in the federal budget and their impact on housing, as well as the AI capex cycle and resource stocks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Defensive sectors (communications, consumer staples, health care)

  Retreat of active capital

  Strengths

  Previously favored for a long time, with some core holdings still supported by high conviction.

  Weaknesses

  Combined active weight fell about 59bp in May, with communications, health care, and consumer staples all being reduced.

  Comparison

  Compared with materials, resources, and cyclical sectors, marginal capital flows into defensive sectors have clearly weakened.

  Risks

  If market risk appetite falls, defensive sectors may regain capital support; but if the current retreat continues, valuations and relative performance may remain under pressure.

• Materials and resource stocks

  Australian proxy for AI capital expenditure and electrification themes

  Strengths

  Supported by demand for copper, aluminum, lithium, critical minerals, data center construction, and grid upgrades, with strong materials-sector performance in May.

  Weaknesses

  Excluding price effects, only 40% of funds increased active weight, indicating the rally contained a large amount of passive following.

  Comparison

  Compared with defensive sectors, materials was the strongest focus of both capital and themes in this period.

  Risks

  Resource prices, the sustainability of AI capex, and crowded positioning may create downside risk.

• Financials and banks

  Affected by property policy and credit growth expectations

  Strengths

  High-yield and fully franked dividend payers may attract greater attention under the after-tax framework.

  Weaknesses

  Changes to capital gains tax, negative gearing, and minimum trust tax may reduce property attractiveness and drag on housing turnover and bank credit growth.

  Comparison

  Compared with resources and insurance-related stocks, the financial sector is under pressure in policy discussions.

  Risks

  If policy effects have already been priced in by the market, the actual drag may be smaller than fund managers fear; conversely, if second-order effects are underestimated, financial sentiment may continue to weaken.

• Real estate, housing-related assets, and REITs

  Affected by changes to capital gains tax and negative gearing

  Strengths

  Some high-yield assets may gain relative attractiveness in after-tax return comparisons.

  Weaknesses

  Fund manager commentary suggests the policy could depress house prices, investor demand, and housing transactions.

  Comparison

  Unlike resource stocks, which are driven by global AI themes, property-related assets are mainly driven by domestic fiscal and tax policy.

  Risks

  Policy timing, details, and changes in market expectations will materially affect the final outcome.

• Love Index upward-momentum stocks (ORI、GMG、QBE、IAG、TLC)

  Improving fund holding preference

  Strengths

  ORI became the most favored stock, while insurance and some cyclical stocks entered the loved zone.

  Weaknesses

  The Love Index is based on concentration in disclosed top holdings and does not equal full portfolio positions or fundamental ratings.

  Comparison

  Compared with traditional defensive/safe-haven assets such as TLS, SIG, and CSL moving lower, this group reflects a shift in preference.

  Risks

  If sector rotation reverses or earnings fail to materialize, relative performance after moving up in the Love Index may retreat.

Key data

• Combined active weight change in defensive sectorsabout -59bpThe combined active weight of communications, consumer staples, and health care declined.
• Communications active weight changeabout -30bpCommunications was the sector with the largest decline in the defensive-sector retreat, close to a two-standard-deviation monthly move.
• Health care and consumer staples active weight changeHealth care about -11bp; consumer staples about -13bpBoth were underweighted alongside communications, indicating the retreat was not a single-sector event.
• Share of funds reducing communications and health care holdingsabout 70%The report sees this as confirmation of a genuine active retreat rather than simple benchmark rebalancing.
• Materials index weight change+230bpThe materials sector's weight rose significantly during the month, creating follow-on pressure for fund managers.
• Share of funds actively increasing materials allocations40%Excluding price effects, only 40% of funds increased active weight in materials, indicating that most funds were still reducing holdings relative to benchmark.
• Materials sector performance in May+10.5%The report states that materials was the best-performing sector in the ASX during May.
• BHP performance in May+16%BHP is cited as an important contributor to the rise in the materials sector.
• Number of sample funds55 fundsUsed for analysis of sector allocation, fund performance, and stock holding concentration.
• Extreme active holding gap in the materials sectorabout 32 percentage pointsAverage of top three active overweights +11.8%, average of top three active underweights -20.6%.
• Extreme active holding gap in the communications sectorabout 11.5 percentage pointsAverage of top three active overweights +7.9%, average of top three active underweights -3.6%.
• Most favored stock in the Love IndexORIORI obtained the 'most loved' position for the first time.
• Least favored stock in the Love IndexFMGFMG remains the 'least loved'.
• Stocks moving up into lovedGMG、QBE、IAG、TLC、ORIThese stocks entered the loved zone of the Love Index in May.
• Stocks falling into underheldORG、LYC、CPUThese stocks moved into the underweight/insufficiently held zone in May.
• SGP days-to-cover change+156.9%The largest increase in days-to-cover among the top 50 stocks, while the share price rose 1.2% over the same period.
• BXB days-to-cover change-73.6%The largest decline in days-to-cover among the top 50 stocks, while the share price fell 26.8% over the same period.

Impact & implications

The investment implication of this report is that marginal capital from Australian active funds is moving out of defensive and high-valuation safe-haven assets, while the market is more willing to express AI buildout, electrification, and global capital expenditure themes through materials, resources, and some cyclical stocks. But true active overweighting in materials remains insufficient, and if sector leadership continues, passive or catch-up buying may still emerge. On the other hand, changes in property taxation may suppress housing demand, bank credit, and sentiment toward financials, so REITs and housing-related assets need close attention to policy implementation and second-order effects.

Risks

• The report is based on fund disclosures and monthly holding data, which may lag real-time trading behavior.
• The Love Index uses only disclosed top-five or top-ten holdings and cannot fully reflect all fund positions.
• The proportion of active overweighting in the materials rally is limited; if prices pull back, benchmark-following positions may face relative risk.
• The impact of property policy may already be partly priced in by the market, and actual second-order effects remain uncertain.
• If themes around AI capex and demand for critical metals cool, resource stocks may face dual pressure from valuation and earnings expectations.
• If the retreat from defensive sectors is merely a tactical trim rather than a structural rotation, the current capital-flow signal may be overinterpreted.

What to watch

• Whether core overweight funds in communications, health care, and consumer staples continue to defend positions, or instead follow the broader retreat from defensive sectors.
• Whether leadership in the materials sector can continue, and whether funds still underweight materials begin catch-up buying.
• Policy details and implementation timing for changes to capital gains tax, negative gearing, and trust tax, as well as their actual impact on house prices, housing turnover, and bank credit growth.
• Whether prices of key metals such as copper, aluminum, and lithium, together with global AI data-center capital expenditure, continue to support Australian resource stocks.
• The subsequent relative performance of Love Index risers such as ORI, GMG, QBE, IAG, and TLC, and whether underheld names such as ORG, LYC, and CPU continue to face pressure.
• Whether stocks with large changes in days-to-cover, such as SGP and BXB, see shifts in short pressure or short-covering rallies.