September In Review: Cyclicals Disappoint

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The ASX200 fell -3.7% in September with energy, financials and communication services leading the fall, stemming from concerns around global recovery and a possible second wave of covid-19 cases.

-The ASX200 declined by -3.7% in September, ending at 5816 points
-Cyclicals underperformed, a phenomenon mirrored across global markets
-Vaccine beneficiary stocks gained
-Outlook for Australia remains optimistic, brokers maintain

By Angelique Thakur

The ASX200 ended the month of September -3.7% lower to close at 5816 points. Thus broke the chain of consecutive gains the Australian stock market had been accumulating since April.

On an international comparison, the ASX200 underperformed the average return of -2.9% for developed market equities. Seen in USD terms, the fall for the ASX200 is sharper at -6.6%.

As global markets retreated through September, the MSCI developed world GICS sectors saw cyclicals fall with energy, financials and communication services the main victims. Utilities, industrials and materials saved the day (or rather the month) with the industrials sector emerging the best performing sector globally.

In contrast, the S&P500 in the US was dragged down by mega-cap technology companies. It fell -3.8% and underperformed all major global markets. Unsurprisingly, the technology-focused Nasdaq fared worse, ending the month down -5.7% for its worst September since 2008.

Global recovery concerns

Reasons for the decline in the Australian stock market, according to Macquarie, include concerns the global recovery could stall in the absence of more US stimulus, concerns about the upcoming US election, and the risk of a contested outcome that could delay much-needed fiscal stimulus.

Also cited were Europe’s rising covid cases coupled with the risk of another US wave this winter. All these potential threats made investors turn risk-averse, causing a strengthening of the US dollar and a rise in high yield credit spreads.

Macquarie expects the “noise” to last until the US presidential election and suggests investors should look past all things temporary.

Taking a broader view, the ASX 200 has been range-bound since the Fed’s balance sheet peaked in June. Macquarie reassures investors more stimulus will follow and forecasts the Fed’s balance sheet to rise to a new high by early November, which could support an upside breakout.

Major themes: Healthcare and vaccine beneficiary stocks ruled September

In Australia, the health care sector rose 0.9% in September while industrials and REITs performed well in a relative sense. The steepest fall was reserved for the energy sector at -11.1%, followed by IT and consumer staples.

Noting the performance of the ASX300 in terms of industry group performance, Macquarie highlights the consumer services group which climbed 0.8% in September. This rise is attributed to vaccine beneficiaries across leisure stocks like Ardent Leisure ((ALG)), SeaLink Travel Group ((SLK)), and Event Hospitality and Entertainment ((EVT)).

Other beneficiaries include gaming stocks like Skycity Entertainment Group ((SKC)), Aristocrat Leisure ((ALL)), Star Entertainment Group ((SGR)), and travel stocks including Corporate Travel Management ((CTD)) and Flight Centre ((FLT)).

Coca-Cola Amatil ((CCL)), Cochlear ((COH)), Qantas Airways ((QAN)) and Sydney Airport Holdings ((SYD)) are some other vaccine plays that equally posted gains.

The construction materials sector posted strong gains with Boral ((BLD)) the top performer in the ASX100 and James Hardie Industries ((JHX)) the fourth-best performer. Macquarie points towards improving sentiment towards housing.

Given the energy sector’s dismal performance, Macquarie was surprised at investors' willingness to lean towards airlines and travel agents, anticipating higher earnings and yet staying away from oil companies even though any increase in the former is likely to boost demand for the latter.

Winners and losers

The top-performing stocks in the ASX100 were Boral, Washington H. Soul Pattison ((SOL)) and Orora ((ORA)).

The worst performers were Virgin Money UK ((VUK)), Origin Energy ((ORG)) and Oil Search ((OSH)).

Inside the Small Ordinaries, Ardent Leisure outperformed the index the most, followed by Skycity Entertainment Group and Ioneer ((INR)). The laggards here were Zip Co ((Z1P)), Unibail-Rodamco-Westfield ((URW)) and Virgin Money.

A-REITs: Investors avoid CBD exposure

As noted earlier, A-REITs performed relatively well during September, but as a group they still lost -1.5% over the month.

Sector outperformers included APN Industria REIT ((ADI)), Home Consortium ((HMC)), Arena REIT ((ARF)), Rural Funds Group ((RFF)), and Charter Hall Social Infrastructure REIT ((CQE)).

On the other hand, laggards included Lendlease ((LLC)), Shopping Centres Australasia ((SCP)), Vicinity Centres ((VCX)), Stockland ((SGP)) and National Storage REIT ((NSR)).

If looked at from a 12 months perspective, A-REITs provided a total return of -16.65%, underperforming the ASX200 Index by -6.44%.

UBS points out REITs with alternative sector exposure did well while those who lagged were exposed to regional malls and CBD Offices.

Credit Suisse prefers grocery-anchored retail centres like Charter Hall Social Infrastructure and Shopping Centres Australasia. For those not too keen on CBD office exposure, the suggestion is to go for metropolitan-office-focused Centuria Office REIT ((COF)) and Growthpoint Properties Australia ((GOZ)).

Within the large-cap diversified REITs, Mirvac ((MGR)) is preferred over Stockland while Dexus Property ((DXS)) is preferred over GPT Group ((GPT)) on a 12-month view.

Even though Credit Suisse rates both Goodman Group ((GMG)) and Charter Hall Group ((CHC)) as Neutral, the broker does have a preference for the former over the latter. In the regional malls category, Credit Suisse prefers Scentre Group ((SCG)) over Vicinity Centres.

Small Ordinaries: Energy leads the way

The Small Ordinaries managed to beat the ASX100 by 0.9% in September, yet the Small Ordinaries Accumulation Index still fell -2.8%.

In a twist, energy was the best performing sector while financials found themselves on the other end of the spectrum as the worst-performer, dropping -10.7% during the month.

As mentioned earlier, Ardent Leisure enjoyed its moment in the sun following the conclusion of court proceedings relating to the 2016 Dreamworld incident. Other outperformers include Skycity Entertainment and Ioneer.

Zip Co underperformed, in response to the news PayPal is launching a competitive product. 

UR-Westfield fell after announcing a EUR9bn debt issue and Virgin Money suffered after new pandemic-related restrictions were imposed in the UK.

Outlook

Citi is worried about a second covid wave and a potentially chaotic US election. But Citi analysts would still buy the dips, especially since central banks will continue to provide support.

Citi recommends investors stay Overweight US and Emerging Market equities, but cut continental Europe to Underweight.

Ord Minnett sees the situation improving in Australia with its analysts pointing towards a marked improvement in Victoria’s case rate. Its positive view is centred around the progressive opening of state borders along with a significant savings buffer among Australia’s households.

Ord Minnett highlights a lift in consensus earnings per share revisions, noting September marked the strongest month-on-month improvement since May 2010.

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