April In Review: Highs & Lows, Plus Energy

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Markets in April witnessed a surge on account of extraordinary fiscal and monetary measures, while the situation on the ground portrayed a dire picture

– ASX200 and S&P500 both posted highest one-month gains in decades in April
– Energy sector the surprising torchbearer while defensive stocks were laggards
-The rebound was led by fiscal and monetary measures, but is a correction due?

By Angelique Thakur

April – tale of highs and lows

April proved an intriguing concoction of highs and lows with deterioration in the global economic conditions and a furious surge in global stock markets going hand in hand.

It was a month full of surprises. WTI crude oil entered into negative territory for the first time in history, with futures contract owners effectively paying to have the commodity taken off their hands.

Analysts at UBS explain the extraordinary circumstance by pointing towards tight storage and pipeline capacity issues. They do think it could happen again.

Global markets rallied, in no small measure due to the unprecedented measures taken by the Fed. The S&P500 gained 12.8% posting the highest one-month gain since October 1974, while the Nasdaq rallied 15.4%.

The ASX200 climbed 8.8% throughout the month, incidentally its best month since 1992. Here the interesting tidbit is when measured in US dollar terms, the Australian index gained 16.3%, which is even better than the Nasdaq.

And gold, spurred on by further expansion of central bank balance sheets, surged 22.5% to US$1689/oz- its highest since 2012.

Energy the anomaly

Ironically the best performing sector, both globally and in Australia, was Energy. The sector ended up 24.8% in Australia, mirroring the 15.7% rise in the global energy sector while the go-to defensive stocks (read staples and utilities) lost steam in April.

The Energy sector surge locally was led by Santos ((STO)) and Oil Search ((OSH)), up 44% and 31% respectively.

Between hope and reality

How high can we go? The question will be on many an investor’s mind after such a stellar performance in April.

Can we possibly go back to 7000 in Australia?

Analysts at JP Morgan have done the calculations and believe for the ASX200 to return to its February high Australian companies need to deliver earnings growth of 47% by 2021, also assuming a two-year average P/E of 15.9x.

In contrast, analysts at Macquarie expect FY20 EPS to fall by circa -15%, with the maximum decrease expected for banks and domestic industrials.

The analysts also consider the forward PE for ASX 200 (17.5x) abnormally high for a contraction, attributing this to Quantitative Easing and consequently, Macquarie expects a market correction in the near future.

Top gainers and losers

Afterpay ((APT)), up 66%, provided a business update mid- April highlighting year-to-date sales growth of 105%, in line with the first half.

Westfield shopping centres owning REIT, Scentre Group ((SCG)) surged 48.9%, helped by a new code of conduct and more certainty around lease agreements. Battered and bruised Boral ((BLD)), despite a gain of 47.3%, only came in third among the larger caps.

On the other side of the coin, Insurance Australia Group ((IAG)) fell -6.8%, followed by Whitehaven Coal ((WHC)) at -5.5% and ResMed ((RMD)) losing -5.2%.

Bucking the trend

The ASX Small Ordinaries climbed 14.3% in April with utilities bucking the trend as the best performing sector while staples continued to play spoilsport.

Mesoblast ((MSB)) rose a whopping 130% after the company’s cell therapy Remestemcel-L was found to be extremely effective for covid-19 patients with respiratory distress syndrome.

Ardent Leisure Group ((ALG)), the worst performer in February, rose 61% after some states moved to reopen the economy in May.

AP Eagers ((APE)), auto dealerships with a strong balance sheet and ample liquidity, saw a rise of 57%.

Navigator Global Investments ((NGI)) was crowned the worst performer for the month, suffering a fall of -56% after withdrawing earnings guidance, while Metcash ((MTS)) fell -34% after raising $330m in fresh equity.

Capital raisings and a voluntary administration

Taken aback by the onslaught of covid-19, last month saw a noticeable number of companies raise capital across multiple sectors.

The list includes Bapcor ((BAP)), Charter Hall Retail REIT ((CQR)), G8 Education ((GEM)), Kathmandu ((KMD)), Lendlease ((LLC)), Metcash ((MTS)), Newcrest Mining ((NCM)), Oil Search ((OSH)), Ramsay Health Care ((RHC)), and numerous others.

On April 21, Virgin Australia went into voluntary administration after failing to secure a $1.4bn bailout from the Australian government. A potential rescue of 10,000 jobs and $1.2bn in customer ticket bookings is still feasible and the process instigated by the company administrators is ongoing.

And then there were the banks. They were due to release interim financial performance numbers.

ANZ Bank released results early on April 29, announcing a fall of -51% in profits mostly due to an impairment charge (read reserves for bad loans) amounting to -$1.67bn. The bank chose to defer its interim dividend.

National Australia Bank ((NAB)), on the other hand, paid out a 30cps dividend to shell shocked shareholders, but with the news also came the announcement of a fresh $3.5bn capital raising.

On the ground reality – A different tale altogether

A number of countries saw new infection rates drop and they are gradually planning to reopen economies. But the overall scenario continues to be grim with some nations experiencing a second wave of covid-19.

Overall, the macroeconomic backdrop deteriorated further in April, contrasting with the seemingly buoyant mood in equity markets.

JP Morgan’s Global Purchasing Managers Index plummeted to a record low of 39.4 with the Global Services PMI leading the fall. The eurozone was the worst hit, while China and other emerging markets saw some recovery.

In Australia, JP Morgan economists point out the tendency of the average Australian is to save, more so in the aftermath of a crisis. Hence JP Morgan fears a repeat reflex in the coming months, which will be a drag on the pace of recovery.

Australian GDP is expected to contract -33.5% in the second quarter, more than the -22% drop in global GDP, predicts the broker. The third quarter should provide some relief with a 6.6% gain predicted, lukewarm in comparison to the expected global bounce back of 34.3%.

Unemployment is set to rise to 11% in the second quarter, according to JP Morgan.

The NAB Monthly Business Survey reported the worst drop in confidence of -66 index pts. Profitability, capacity utilisation and forward orders have all been hit due to the lockdown and point towards weak activity in the coming months.

Conclusion

The unprecedented monetary and fiscal responses from central banks and governments globally has led to a market rebound in April when macroeconomic data pointed towards the huge economic cost of covid-19 led shutdowns.

Macquarie is cautious and considers the market to be vulnerable to a market correction, especially in case of a removal of the stimulus.

The broker advises investors to focus on building a quality portfolio, believing the market is likely to face a period of range bound trading with already high valuations restricting further upside.

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