Australia | Aug 06 2020
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The ASX200 rose 0.5% in July led by materials, technology and consumer staples; the August reporting season may find companies hesitant to provide guidance amid an uncertain outlook
-The ASX200 tottered to a monthly gain of 0.5% in July
-The Materials sector led the way while energy stocks were clobbered
-All eyes now on the August reporting season
By Angelique Thakur
A quick snapshot
The Australian stock market ended yet another month in the green — the fourth consecutive month, just barely. Australian stocks rose a measly 0.5% in July with the ASX200 closing at 5927.8, 29.9 points higher than at the end of June.
The local index lagged the S&P500 which, mostly driven by technology stocks, rose by 5.5%.
Not that technology stocks underperformed in Australia. On the contrary, the technology sector gained 4.8% in July. But where technology stocks make up 27.5% of the S&P500, they represent only 3.6% of the ASX200.
Mining stocks, accounting for about 15% of the ASX200, performed well. Gold stocks grew by 10.3%.
Commodities, in general, were driven by rising prices, seen in the case of gold, copper and iron ore. The strong gains continued despite the strengthening Australian dollar which rose 4.2% during the month.
The materials sector gained 5.8% and was the best performer. In fact, if not for the materials sector, JP Morgan points out the domestic equity market would have been in negative territory.
Banks suffered from covid-19 related headwinds in the form of increasing bad debts. Bond yields slumped to their lowest levels since April along with a flattening yield curve worsened an already challenging situation.
This showed up in the performance of the sector which registered a decline of -1.3%. ASX200’s higher share of the banking sector did not help matters. Bank stocks form 18.6% of the ASX200.
This also explains, in part, the divergence from and underperformance versus the S&P500 of which bank stocks comprise just 3.5%.
In developed markets, materials, consumer discretionary and utilities led the way while energy, financials and industrials underperformed.
Small Ordinaries: Not so ordinary
The Small Ordinaries Index posted a relatively strong performance, rising 1.4% in July. It ended up outperforming the ASX200 by 0.9%. The Small Industrials Index fell -0.1% while the Small Resources Index rose by 7.6%.
Even in the Small Ordinaries, materials was the best performing sector and rose 5.8%. This was followed by the financials and IT sectors, up 2.8% and 2% respectively.
Healthcare disappointed at -3.6% followed by energy (-3.1%) and utilities (-2.1%).
Some other notable performers were Netwealth Group ((NWL)) and Pinnacle Investments ((PIN)), up 34% and 29%.
Technology stocks: The winning streak continues
The ASX technology Index rose 3.9% versus the ASX100’s 0.5%. The WAAAX stocks continued to charge full steam ahead in July.
Even though it considers valuations in this sector to be full at current prices, Credit Suisse thinks investors are looking at the sector from a post-sell-off perspective. This is due to the sector’s long-term attractiveness and ability to report relatively strong results.
Credit Suisse is Neutral on Corporate Travel Management ((CTD)) and Webjet within travel stocks.
Property: Retail REITs continued to suffer
ASX200 REITs rose 0.6% in July. Unsurprisingly, retail and office landlords suffered due to the pandemic. Vicinity Centres ((VCX)), Dexus Property Group ((DXS)) and GPT Group ((GPT)) are among under the 20 worst performers on the ASX100.
REITs with exposure to industrial property benefited due to the lockdown-driven jump in e-commerce. Goodman Group ((GMG)), up 14% in July, is a classic case in point. Charter Hall Group ((CHC)) is another example, up 8.6%.
Unibail-Rodamco-Westfield ((URW)) fell -10.4% during the month. Its first half result saw earnings down -28% year on year, mostly covid-19 related. Considering the uncertainty, no guidance was provided.
Ord Minnett highlights Vicinity Centres announced a decline of -11.3% across its entire portfolio of shopping mall assets. Customer visits were 68% of last year.
Stock specific highlights of July
Some important news making stocks of the month were Afterpay ((APT)) which raised $800m, to be used for increasing its footprints across the world, accelerating growth.
Gold miner Bellevue Gold ((BGL)) raised $120m to fund its project in Western Australia.
Retailer City Chic Collective ((CCX)) raised $90m to strengthen its balance sheet and fund a potential acquisition of US-based retailer Catherines.
August Reporting Season: Hesitant to commit
The local reporting season has started. July saw Fortescue Metals Group report another record year, surpassing its shipments guidance. GUD Holdings’ ((GUD)) FY20 result was seen as solid, demonstrating resilience and strong execution from management.
Rio Tinto’s ((RIO)) FY20 result beat expectations, although UBS feels the dividend could have been higher.
For the August reporting season, Macquarie expects Australian earnings to fall by circa -19% (FY20). Banks and industrials are expected to lead the way here.
Investors have already anticipated this and will be more focused on outlook comments and earnings forecasts for FY21-22.
Unfortunately, Macquarie expects only a few companies to provide any concrete earnings guidance in August. The analysts point out, of the nine companies that released their results in July, only Credit Corp Group ((CCP)) provided clear earnings guidance.
JP Morgan expects record profit declines and write-downs to feature this reporting season. It agrees with Macquarie companies will be hesitant to commit to definitive guidance.
According to JP Morgan, discretionary retailers, financials and energy sectors will not come out looking good this season.
Apart from the actual results, the expanding second wave of covid-19 cases in Victoria might have a say in how the Australian stock market performs in August. The second wave in particular represents a risk to an already fragile recovery.
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