Australia | Feb 05 2021
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During January the ASX200 ended the month virtually where it started with consumer discretionary and banks the standout sectors
-The ASX made gains of 0.3% in January
-Value outperformed growth
-Commodity prices were a key area of strength
-FY21 expected to deliver 9.5%-plus earnings growth
-Policy and vaccine evolution underscore positive growth outlook
By Mark Story
Early to mid-January, stock market trading was dominated by returning optimism towards reflation and cyclically-led rotation opportunities. Following the US Georgia run-off election outcomes, US share markets hit record highs on the prospect of the Democrats winning both Senate seats.
Half way through the month, US President-elect Joe Biden announced a US$1.9trn economic stimulus package. US Federal Reserve chairman Jerome Powell also stated that the accommodative monetary policy stance would remain intact “until the job was well and truly done”.
However, as the month progressed, this momentum gave way to a pullback as investors grappled with equity markets trading ahead of fundamentals.
Asian markets generally outperformed in the month of January, with the Hang Seng and the China SCI 300 up 2.7% and 3.9% respectively.
With a modest gain of 0.3%, the ASX200 index outperformed the -1.1% fall in the S&P 500, and the Developed World's return of -0.7% in local currency terms. Despite modest gains on the ASX200 over the month of January, 61% of companies booked positive returns.
With the storming of the US Capitol Building and trading frenzy dominating the latter half of January, the US Dow Jones Index fell by -2.0%.
It was a similar story across Europe with the German Dax index down -2.1% and the UK FTSE -0.8% lower. Both the Nasdaq and Japan’s Nikkei index managed gains of 1.4% and 0.8% respectively, while MSCI Emerging Markets Index went up 3.7%.
Globally, energy & healthcare were the only sectors which rose in January.
Australian Stock market by Sector
Six out of Australia’s 11 industrial sectors posted gains in January with consumer discretionary leading the charge with gains of 4.7%.
Earnings upgrades, mostly due to lower bad debts, also supported banks in January, up 4%. All the Big Four banks proved solid performers with Westpac ((WBC)) up 9.1% leading the gains.
The other notable standout sectors were communication services, up 2.7% and financials up 2.2%.
Real estate was the worst performing sector, falling -4.3%. With the exception of Stockland’s ((SGP)) 6.5% gain, all ASX 100 real estate stocks fell in January.
Industrials and healthcare were down -3.0% and -1.8% respectively in January.
Large caps, which were preferred over mid-caps (-1.1%) in January were up 0.7%.
While the ASX20 managed gains of 1.6%, at the lower end of the market the Small Ordinaries lost -0.3%.
Z1P Co ((ZIP)) contributed the most to the Small Ordinaries returns, followed closely by Lynas Corp ((LYC)), and Pointsbet Holdings ((PBH)), while Polynovo’s ((PNV)) share price crash was by far the largest detractor.
The transport sub-sector, down -5.3% was also a poor performer in January, with rising bond yields taking their toll on infrastructure stocks, while airlines were negatively impacted by a delayed travel recovery.
Due to the recent covid-19 wave, key areas of weakness showed up for the travel sector with Flight Centre ((FLT)) down -11.2%, Webjet ((WEB)) down -5.7%, and Corporate Travel Management ((CTD)) down -4.9%; as well as casinos with Star Entertainment ((SGR)) down -6.2% and Sky City Entertainment ((SKC)) -5.4% lower.
Best and worst Australian Stocks within Indices
Among the Small Ordinaries, the best performers were Australian Ethical Investments ((AEF)) up 39.2%, Zip Co (mentioned above) gained 37.4%, and Avita Medical ((AVD)) rose 34.1%.
Value versus Growth
Australian value outperformed growth for the fourth consecutive month, this time by 2.5%.
The stronger gains from value were concentrated near the start of the month when bond yields spiked, while growth performed better as bond yields subsequently retraced gains.
Early to mid-January trading was dominated by heightened, albeit short lived optimism towards reflation and cyclically-led rotation opportunities, particularly following the US Georgia run-off election outcomes.
Morgan Stanley’s US strategy team highlighted how equity markets had traded ahead of the fundamentals and the rates market – and saw good reason for the rotation trade to pause and/or correct.
While there’s no sign of a bubble, the broker maintains the correction is not over until leverage is reduced further by both institutional and retail investors.
The technology sector started the year slowly, but by the end of the month managed to marginally outperform the broader market with a gain of 0.8%.
The median revenue multiple in the technology index at 31 January was 6.4x, compared to 6.5x at 31 December 2020 and 5.0x at 31 Dec 2019.
The mean revenue multiple for the WAAAX stocks Wisetech Global ((WTC)), Afterpay, Altium ((ALU)), Appen ((APX)) and Xero at 31 January was 20.4x, compared to 19.5x at 31 December 2020 and 13.0x at 31 Dec 2019.
Credit Suisse continues to view the technology sector favourably from a business execution perspective, and views the primary risk to share prices to be from a market-wide value rotation rather than company specific catalysts.
Real Estate Investment Trusts
REITs underperformed the ASX200 in January by -4.38% amid a backdrop of equity market and bond market volatility, with rising bond yields likely the key driver.
Credit Suisse noted that REITs are trading at a 57.5% premium to net tangible assets (NTA) which is (well) above the longer term average of around 19%.
Underperformers in the month included: Centuria Capital ((CNI)) down -11.4%, Mirvac Group ((MGR)) down -9.8%, Centuria Office ((COF)) down -8.6%, Lendlease ((LLC)) down -8.3%, and Growthpoint Property ((GOZ)) which fell -8.3%.
Outperformers for the month included: Stockland ((SGP)) up 6.5%, Irongate Group ((IAP)) which rose 3.1%, Ingenia Group ((INA)) up 2.0%, APN Industria ((ADI)) which put on 1.4%, and Arena REIT ((ARF)) which rose 0.3%.
Retail sales data from REITs for the 31 Dec 2020 period are yet to be seen. However, Credit Suisse suspects the discount ascribed to those with reegional mall exposure implies structural concerns that go beyond a post-covid recovery.
The broker sees scope for a better shorter term outlook for the regional-mall exposed names, with the potential for the re-setting of specialty rents to be more gradual than currently reflected.
While Credit Suisse isn’t as bearish as other market participants over the medium-to long-term outlook for office, it acknowledges the risk of falling effective rents and/or increased vacancy risk (particularly in Sydney) and thus positive earnings catalysts may be lacking.
For retail- and office-exposed names in particular, the broker believes covid would impact metrics beyond February 2021. However, Credit Suisse analysts will be focusing on key items such as: (1) short-term expiry risk; (2) retail holders; (3) and trends in rent incentives; (4) rent collection; (5) cash flows; and (6) the resumption of normalised maintenance capex.
With only a handful of REITs having provided firm earnings guidance, Credit Suisse suspects any “surprise” to be relative to consensus expectations – particularly for regional mall-exposed names.
The Equity Outlook
With recovery paths better mapped and supported by both policy and vaccine evolution, Morgan Stanley expects the first half 2021 results season to see the return of more detailed outlook commentary.
The broker believes the provision of outlooks and firmer recovery paths will assist conviction in direction for outer-year earnings and likely boost revision strength.
With consensus forecasts for full year 2022 market EPS a full -12% below what was being forecast for FY22 in Jan-20, Morgan Stanley expects this to provide scope for upgrades.
With the strong global and domestic recoveries in play, alongside significant and sustained stimulus, the broker expects bottom-up pre-covid earnings forecasts to be regained.
Macquarie also remains positive on the earnings outlook and is forecasting Australian market full year 2021 EPS growth of 9.5% (as of Feb 1, 2021), with higher commodity prices supporting strong growth in resources (22.9%). The broker is also looking for 6.1% growth from banks.
Macquarie continues to think covid winners are more likely to beat. But it expects the price impact of beats will be muted as investors anticipate tougher comparables in a few months' time.
Recent indicators provide cause for optimism around the outlook for GDP and the economy more broadly, and Credit Suisse continues to see the vaccine rollout as a key driver of equity returns in Australia (and worldwide).
Value stocks will be a focus during reporting season due to their leveraged exposure to the economic recovery. UBS expects three key trades: 1) cyclicals over defensives; 2) value over growth; 3) small caps over large caps to likely work for the majority of 2021.
UBS is flagging an eventual pre-covid (and pre-stimulus) backdrop of low growth and low rates once the US achieves herd immunity in the third quarter of 2021.
The broker also thinks 2022 could look a lot like 2019 when the Defensive Income and Growth (DIG) trade worked well.
After a -24.4% fall in FY20 EPS, UBS expects EPS to rebound 23.3% in FY21 due to recovering economies and near record high commodity prices.
Consensus expects resources to lead EPS growth in FY21 at 42.4%, followed by financials at 23.3 %, while industrials ex-financials lag, with forecast EPS up just 3.1%.
Due to higher inflationary expectations, the Australian ten-year government bond yield rose by 12 basis points to 1.09%. Global bond yields also rose in January, with the US ten-year government bond yield rising 17bp to 1.09%.
Bond yields spiked at the start of the month, following the US Democrat’s victory in gaining both Senate seats in Georgia.
The rise in bond yields weighed on infrastructure stocks, and real estate, turning both in January’s worst performing sectors. While yields have since fallen back somewhat, Macquarie continues to expect higher yields in 2021.
The broker notes that earnings upgrades, due to lower bad debts, also supported banks.
While the Reserve Bank of Australia (RBA) had been in 'blackout' since last year, and economic data have been materially stronger than expected, markets and investors have been speculating the RBA might taper its policy stance.
However, at its first meeting in 2021 the RBA decided to extend its bond purchase program until September.
Once the global economy recovers further, and global central banks taper their respective QE programs, UBS expects the RBA to stop buying bonds under its 'proper QE' framework (assuming the domestic economy also continues to recover).
UBS does not believe the markets are fully priced for ongoing easing from the RBA.
UBS also thinks it’s likely the RBA will keep the Yield Curve Control (YCC) at three years until, at least, international borders actually re-open in Australia (i.e. not just on the prospect of a vaccine).
At this week’s meeting, the RBA confirmed the UBS blueprint.
The CRB Commodity Index rose 3.8% to 174 in the month of January.
Driven by vaccine optimism and a surprise Saudi oil supply cut, Brent Oil prices rose US$4.08/bbl to US$55.88/bbl. Gold prices fell in January by -2.7%, and ended the month at US$1,863.80/oz.
During the first half of January, iron ore prices surged to US$170/t, due to strong growth in Chinese imports and reduced exports from Brazil and South Africa. But during the latter half of January, the iron ore price had retraced back to US$158/t to be down -1.2% for the month.
While prices are forecast to moderate further towards a long term price forecast of US$65/t, UBS believe this decline may be slower than the market is currently pricing in and it thinks a price north of US$100/t in 2021 is achievable.
The Australian dollar fell marginally (-0.8%) during January to finish at US76.3 cents.
The USD index (DXY) appreciated by 0.8% in January, as risk appetite cooled.
The Norwegian Krone (0.5%), Great British Pound (0.2%) and New Zealand Dollar (- 0.2%) were the best performing currencies, while the Swedish Krona (-1.5%), Japanese Yen (-1.5%) and Canadian Dollar (-0.8%) were the relative underperformers.
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