October In Review: Banks & Tech Outperform

Australia | Nov 09 2020

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

During October the ASX200 outperformed most developed markets peers, with the financial and technology sectors leading the way.

-The ASX200 climbed 1.9% during October
-Banks rose and technology outperformed
-JPMorgan sees AUD/USD at 68c by year-end

By Mark Woodruff

The ASX200 was one of the best performing equity markets globally in October, particularly relative to developed market peers.

Global markets retreated through October, driven by fading US stimulus expectations, US technology sector earnings results that were met with sell-the-fact profit-taking, and rising covid cases. Utilities and communication services were the only sectors that did not fall, as energy, information technology, and healthcare underperformed.

The S&P500 fell -2.8%, but still slightly outperformed the developed markets world return. The world developed markets underperformance was led by the MSCI Europe (ex UK) falling -5.5%. 

In comparison MSCI emerging markets rose 1.4%, while in China the CSI300 increased 2.4%.

Australian Stockmarket by Sector

The ASX200 rose 1.9% in September, outperforming the -2.8% fall in the S&P500 in the US. The rise was aided by a market-friendly government budget, the prospect of further monetary stimulus, and the reopening of the domestic economy.

There was also a global rotation to banks as US bond yields rose. Australian banks outperformed US banks by 4% with help from said budget.

Within sectors, information technology rose by 8.6% followed by financials which increased 6.3%. Industrials and utilities, down by -3.5% and -1.5%, respectively, were the notable laggards.

In terms of contribution toward the index, the financial sector was the clear outperformer in October and retraced its losses from September. Gains were made across all the banks with Commonwealth Bank ((CBA)) the highest points contributor for the month. 

The average total shareholder return of the major banks was 7.2%, while the regional banks returned 11.4% in October.

All the majors outperformed, and in order of percentage gain were ANZ Bank ((ANZ)) 9.2%, Commonwealth Bank 8.5%, Westpac Bank ((WBC)) 6.4% and National Australia Bank ((NAB)) 4.8%.

When the pandemic struck, Australian dividend expectations fell much more sharply than the rest of the world. The negativity surrounding the Australian dividend picture was compounded mid-year as global projections turned positive, while local estimates continued to fall. However, in the past two months, Australian dividends are mounting something of a comeback. October's 3.2% lift in one-year forward expectations was the largest monthly increase since July 2007.

Non-bank financial stocks on average outperformed the ASX200 in October. Link Administration Holdings ((LNK)) increased 28% and AMP Ltd ((AMP)) rose 17% on the back of corporate activity, while Janus Henderson Group ((JHG)) also went up 17% after a new activist shareholder emerged.

Technology was the best performing sector, with Afterpay ((APT)) the top contributing stock.

Industrials were the worst sector, falling -3.5% with materials not far behind.

Rising covid-19 cases outside Australia were evident in the poor returns from ASX travel names. These included Flight Centre ((FLT)), Corporate Travel Management ((CTD)), Webjet ((WEB)) and Sydney Airport (SYD)), which all fell between -7% and -18%. Qantas ((QAN)) bucked the trend, due to less international exposure.

Transport infrastructure lagged in part due to the rise in US bond yields. This affected Aurizon ((AZJ)), Atlas Arteria ((ALX)), and Transurban ((TCL)), which all fell between -5% and -11%.

Best and Worst Australian Stocks within Indices

The best performing ASX 100 stocks during the month were Coca-Cola Amatil ((CCL)), Link Administration and Challenger ((CGF)). The ASX100 increased 2.1% during October.

The worst performers were Flight Centre, Vicinity Centres ((VCX)) and Aurizon.

The Small Ordinaries eked out a 0.3% gain, with outperformance by Ioneer ((INR)), Nickel Mines ((NIC)) and Pilbara Minerals ((PLS)).

The worst performers were Mesoblast ((MSB)), Opthea ((OPT)) and Mayne Pharma Group ((MYX)).

Technology Sector 

As noted above, technology stocks outperformed in October, led by the WAAAX stocks.

The ASX technology index was up 6.5%. Within the technology index, Link Administration, Dicker Data ((DDR)) and Livetiles ((LVT)) were the best performers, while Catapult ((CAT)), Megaport ((MP1)) and Temple & Webster ((TPW) fell for the month.

Credit Suisse has a preference, within the technology sector, for Infomedia ((IFM)), Audinate ((AD8)), and Life360 ((360)), while holding Neutral ratings for WiseTech Global ((WTC)), Iress ((IRE)), Appen ((APX)) and Xero ((XRO)).

Overall the broker has a positive view on the business outlook for much of the travel-related technology stocks, although finding attractive opportunities is increasingly challenging at current valuation levels. Corporate Travel Management is preferred over Webjet, although both are rated Neutral.

REITs

For the month ended October 31, REITs underperformed and provided a total return of -0.37%.

Credit Suisse believes a lack of guidance continues to weigh-down many REITs, with investors rewarding stocks with either earnings predictability or structural tailwinds.  Concern also remains over the post-covid-19 rental/valuation outlook for those exposed to CBD office and regional malls. 

Rent collection rates improved in the September quarter relative to the June quarter for those stocks covered by the broker. Generally, office and industrial sectors remained resilient. They had greater than 90% collection rates (with metro office higher than CBD office), while retail improved relative to the June quarter. Those with Victorian and/or Sydney CBD retail exposure have not fared as well as grocery anchored neighbourhood centres.

The broker remains attracted to neighbourhood retail exposures such as Charter Hall Retail ((CQR)) and Shopping Centres Australasia ((SCP)), with the former screening relatively cheaper. 

Additionally, there is considered value in diversified REITs such as Dexus Property ((DXS)) and Mirvac Group ((MGR)). However, investors may be wary of shorter term negative news flow regarding CBD office markets, and as a result these stocks may appeal to longer term investors. 

Shorter term investors may prefer the metro-office exposed REITS like Centuria Office REIT ((COF)) and Growthpoint Properties Australia ((GOZ)) that offer attractive forecast yields.

Credit Suisse expects fund managers Charter Hall Group ((CHC)) and Goodman Group ((GMG)) will continue to be well supported. This is despite appearing expensive versus traditional REITs, from an earnings multiple perspective.

Finally, the broker sees Vicinity Centres and Stockland ((SCG)) as undervalued asset plays, despite a lack of near-term catalysts.

Outperformers for the month of October included Home Consortium ((HMC)), Lendlease ((LLC)), Shopping Centres Australasia,  Rural Funds Group ((RFF)), Aventus Group ((AVN)) and Charter Hall Social Infrastructure REIT ((CQE)).

Underperformers in the month included Vicinity Centres, Stockland, Charter Hall Long Wale REIT ((CLW)), Dexus Property, Mirvac and Abacus Property Group ((ABP)).

The two largest out performers and under performers for the year ended October 31 are Rural Funds Group up 41% and Goodman Group up 30%, while Vicinity Centres and Stockland fell -52% and -43%, respectively.

Bonds

Global long-end yields rose in October, with the US 10 year government bond yield rising sharply by 17 basis points to 0.85%, to reach the highest level since early June. The move higher has mostly been driven by expectations of large-scale post-election stimulus. This would lead to higher inflation in the medium-term. Howevere the likelihhod of a Republican senate post-election has seen yields fall back.

As nominal yields are still at historically low levels the JP Morgan rate strategists do not expect the Federal Reserve to change the pace or composition of asset purchases in response to the recent rise in yields.

The Australian 10 year government bond yield rose slightly by 4 basis points to 0.83%.

Currencies

The US dollar rose 0.2% in October, largely driven by an increase in risk-off sentiment. 

The Australian dollar weakened again in October, following the -3.6% decline in September. It was the second worst performing currency globally, dropping -1.9%, following a decline in iron ore. Also, a dovish speech by RBA Governor Lowe increased anticipation for a November RBA cash rate cut. (The RBA has subsequently cut the cash rate to 0.1% from 0.25% and initiated quantitative easing of $100bn).

The Australian dollar is expected to fall further from this point following the announced ramp up in quantitative easing (QE) purchases by the RBA. The JP Morgan economist forecasts US68 cents for the end of this year. The Brazilian Real was the weakest currency, down -2.4%, another reflection of the drop in iron ore prices.

Commodities

Global commodity prices fell slightly in October. 

Brent Oil prices fell -US$3.49/bbl to US$37.46/bbl, partly driven by an appreciating US dollar.

Iron ore prices fell by a slight US$2.00/t to US$118.00/t. 

Gold prices decreased slightly to $US1,881.85/oz from $US1886.90/oz, but were still close to record highs.

The JP Morgan global commodities team remain bullish on copper, with prices expected to average $7,500/t in the second quarter of FY21. This view is driven by the expected continuation of strength in Chinese metals demand and a cyclical post-recessionary demand recovery in the rest of the world. 

Technical limitations

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CHARTS

ABP AD8 ALX AMP ANZ APT APX AVN AZJ CAT CBA CCL CGF CHC CLW COF CQE CQR CTD DDR DXS FLT GMG GOZ HMC IFM INR IRE JHG LLC LNK LVT MGR MP1 MSB MYX NAB NIC OPT PLS QAN RFF SCG SCP TCL VCX WBC WEB WTC XRO

For more info SHARE ANALYSIS: ABP - ABACUS PROPERTY GROUP

For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED

For more info SHARE ANALYSIS: ALX - ATLAS ARTERIA

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: ANZ - AUSTRALIA & NEW ZEALAND BANKING GROUP

For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: AVN - AVENTUS GROUP

For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED

For more info SHARE ANALYSIS: CAT - CATAPULT GROUP INTERNATIONAL LTD

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CCL - COCA-COLA AMATIL LIMITED

For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: CLW - CHARTER HALL LONG WALE REIT

For more info SHARE ANALYSIS: COF - CENTURIA OFFICE REIT

For more info SHARE ANALYSIS: CQE - CHARTER HALL SOCIAL INFRASTRUCTURE REIT

For more info SHARE ANALYSIS: CQR - CHARTER HALL RETAIL REIT

For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED

For more info SHARE ANALYSIS: DDR - DICKER DATA LIMITED

For more info SHARE ANALYSIS: DXS - DEXUS PROPERTY GROUP

For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: GOZ - GROWTHPOINT PROPERTIES AUSTRALIA

For more info SHARE ANALYSIS: HMC - HOME CONSORTIUM LIMITED

For more info SHARE ANALYSIS: IFM - INFOMEDIA LTD

For more info SHARE ANALYSIS: INR - IONEER LTD

For more info SHARE ANALYSIS: IRE - IRESS LIMITED

For more info SHARE ANALYSIS: JHG - JANUS HENDERSON GROUP PLC.

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED

For more info SHARE ANALYSIS: LVT - LIVETILES LIMITED

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: MP1 - MEGAPORT LIMITED

For more info SHARE ANALYSIS: MSB - MESOBLAST LIMITED

For more info SHARE ANALYSIS: MYX - MAYNE PHARMA GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: NIC - NICKEL MINES LIMITED

For more info SHARE ANALYSIS: OPT - OPTHEA LIMITED

For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED

For more info SHARE ANALYSIS: QAN - QANTAS AIRWAYS LIMITED

For more info SHARE ANALYSIS: RFF - RURAL FUNDS GROUP

For more info SHARE ANALYSIS: SCG - SCENTRE GROUP

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP

For more info SHARE ANALYSIS: VCX - VICINITY CENTRES

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WEB - WEBJET LIMITED

For more info SHARE ANALYSIS: WTC - WISETECH GLOBAL LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED