July In Review: Shaky Recovery & Persisting Risks

Australia | Aug 06 2020

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 top gainers in the ASX100 were all from the mining sector – ALS Ltd ((ALQ)), Fortescue Metals Group ((FMG)), OZ Minerals ((OZL)) and Northern Star Resources ((NST)).

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.

Energy was the worst performer. It fell -6.3% even after the price of Brent rose 4.5%. Ampol ((ALD)), Oil Search ((OSH)) and Woodside Petroleum ((WPL)) were some of the worst performers of the month.

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%.

Some other stocks that lagged include Qantas Airways ((QAN)) and Insurance Australia Group ((IAG)), both of which almost dropped by -12%.

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%).

Among individual stocks, HUB24 ((HUB)) grew 43.4% while Galaxy Resources ((GXY)) was up 41.9%. Pilbara Minerals ((PLS)) was also a strong performer at 40%.

Some other notable performers were Netwealth Group ((NWL)) and Pinnacle Investments ((PIN)), up 34% and 29%.

The worst of the lot were Avita Medical ((AVH)), Adbri ((ABC)) and Phoslock Environmental Technologies ((PET)) which lost -32.6%, -30.5% and -29.5% respectively in July.

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.

The best of the best were Life360 ((360)) which gained 65% while Catapult Group International ((CAT)) and Nitro software ((NTO)) rose 46% and 31%.

The WAAAX stocks – WiseTech Global ((WTC)), Afterpay ((APT)), Appen ((APX)), Altium ((ALU)), Xero ((XRO)) – gained 6% in July.

Resapp Health ((RAP)), down -20% was the worst performer followed by Webjet ((WEB)) which lost -15% and Pushpay Holdings ((PPH)), down -12%.

Credit Suisse prefers Infomedia ((IFM)), Xero, WiseTech Global and Life360 ((360)), in that order. It is Neutral on Appen, Audinate Group ((AD8)) and Iress ((IRE)).

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.

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