Australia | Mar 04 2021
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During February the ASX200 recorded a fifth consecutive monthly rise with the materials and financial sectors leading the way.
-The ASX200 rose 1% during February
-Value and large caps outperformed
-The Australian 10-year bond yield rose 79 basis points
By Mark Woodruff
In an eventful month for ASX investors, the focus was initially on the reporting season until rising bond yields also demanded attention. After rotations toward large caps, value stocks and prior covid losers, the ASX200 landed on a 1% gain for February. This was the fifth consecutive monthly rise for the bourse.
However, on the world stage the Australian performance generally lagged, with the S&P500 in the US and the MSCI World Developed markets index both rising by 2.6%. The latter outperformed the Emerging Markets World return of 0.8% in US dollar terms.
Developed markets outperformance was partially driven by the Euro Stoxx Index which rose by 4.5%. Additional impetus came from both the FTSE100 and the Nikkei225 after climbing 3.4% and 2.9%, respectively.
Value versus Growth
Value outperformed growth by 9.4% in February, extending the total outperformance to 31% over a five month period. Macquarie expects this trend will continue as vaccines drive normalisation in the economy and rising bond yields pressure valuations.
The rise in the Australian dollar is also considered to drive a rotation to more domestically-oriented stocks, which are a higher share of the value group.
Rising bond yields partly impacted Utilities which fell by -8.8%, while Real Estate -2.0% and Telecom -0.4% (both covid-19 losers) were less impacted by the rise.
The Materials sector rose 7.3% and was the top performer followed by Financials up 5.2% and Energy by 2.4%.
Higher commodity prices supported the Materials sector with mining stocks rallying strongly. OZ Minerals ((OZ)) jumped by 20.1%, Rio Tinto ((RIO)) 15.3%, BHP Group ((BHP)) 12.8% and Fortescue Metals Group ((FMG)) rose by 10.6%.
Macquarie feels leading mining stocks are still well placed to benefit from global reflation, as higher commodity prices drive earnings upgrades and higher yields have less impact on valuations. With a fall of -9.5%, gold stocks continue to underperform other mining stocks, as they are negatively impacted by the increase in real bond yields.
As expected in a rising yield environment, the longer duration Technology sector underperformed and fell by – 8.9%, while the Utilities -8.0% and Consumer Staples -4.6% sectors also underperformed.
There were stronger share price returns from covid losers (compared to prior winners) even when they missed expectations (e.g. travel), notes Macquarie. This was despite prior winners often posting positive earnings surprises (e.g. retail).
The broker still expects mean reversion due to vaccines and thinks other covid losers will follow the lead of the banks and turn into winners. In contrast, many covid winners face tougher comparisons in coming months. The analysts think it unlikely Coles Group ((COL)) is the only company that has a period of negative growth at some point in 2021.
Large caps dominated during February with BHP Group ((BHP)) the largest contributor to the index followed by Westpac Bank ((WBC)) and ANZ Bank ((ANZ)). Wesfarmers ((WES)) was the largest detracting stock.
The best performing ASX 100 stocks
The Small Ordinaries
Similar to the large caps space, Financials was the top contributing sector, followed by Materials. Industrials and Real Estate were the largest detractors.
In the month of February, technology stocks underperformed the broader market with the ASX technology index falling by -7.1%.
WAAAX stocks were down -11.6% for the month. On a 12-month view Credit Suisse thinks Altium ((ALU)), WiseTech Global ((WTC)) and Xero ((XRO)) can all outperform the market absent a sector rotation, while Appen ((APX )) still offers downside risk.
For small cap technology stocks, the broker’s order of preference remains unchanged and is headed by Audinate Group ((AD8)). This is seen as a structural covid beneficiary and a re-opening play.
The next preferred is Life360 ((360)) which is seen as poised for sales growth acceleration and a valuation re-rate. Finally, Infomedia ((IFM)) is considered attractive as northern hemisphere conditions normalise.
Within travel, the analysts are upbeat on both Corporate Travel Management ((CTD)) and Webjet ((WEB)), with a preference for the former, though Webjet is more likely to be the earlier beneficiary of a return to travel.
REITs were down -2.64% over February, underperforming the ASX200 by -4.09%, and underperforming by -8.4% on a year-to-date basis.
During February regional retail-exposed names GPT Group ((GPT)), Scentre Group ((SCG)) and Vicinity Centres ((VCX)) saw the relative highest upgrades by Credit Suisse. This was after re-assessing how quickly negative rent reversion would cycle through their respective retail portfolios.
While the reporting season yielded few negative surprises for the sector, the Australian ten-year bond rose to 1.88% at 28 Feb 2021 versus 1.09% at the close of Jan 2021. The dividend yield spread over bonds narrowed to around 2.6% versus circa 3.2% one month ago.
For the month, outperformers included Lendlease ((LLC)), Scentre Group and Vicinity Centres while underperformance came from Charter Hall Group ((CHC)), BWP Trust ((BWP)) and GDI Property Group ((GDI)).
First half earnings surprises were generally to the upside relative to Credit Suisse’s estimates, due to overly aggressive rent-relief assumptions by the broker. Additionally, a few one-offs and reversals of FY20 credit loss provisions contributed to the missed forecasts.
Despite this, post-result FY21-FY23 earnings changes were generally either up or down by no more than 5%.
Rent collection rates have improved though the analyst thinks investors are now more focused on structural and cyclical challenges. The question being what implications these will have for rents and values, with an eye on shorter term expiry risk.
It didn’t surprise Credit Suisse that retail sales were weak on a twelve month moving annual turnover (MAT) basis. However, sales showed signs of life in the December quarter. Occupancy costs were generally higher, and leasing spreads were generally negative across the broker’s coverage.
Office occupancy on balance was slightly lower with incentives trending higher compared to FY20 levels, while industrial fundamentals remain healthy. However, revaluation gains have been driven more from cap rate compression than rental growth, highlights Credit Suisse.
Residential sales volumes benefitted from government stimulus and low interest rates and Scentre Group was the clear winner from this in the broker’s coverage.
Amongst Credit Suisse’ Outperform calls, the broker prefers Goodman Group ((GMG)) for industrial and fund management exposure. There is also considered to be value in the diversified REITs in particular Dexus Property Group ((DXS)), GPT Group and developer Mirvac Group ((MGR)).
The broker also has a preference for Charter Hall Retail REIT ((CQR)) in retail and Growthpoint Properties Australia ((GOZ)) within the small to mid-caps. Finally, the analysts are also positive on Lendlease overall.
Consumer sector – EPS estimates
Within Australian Consumer, the Discretionary sector (including gaming) fell -3.9% and Staples declined by -5.0% in February.
Retail saw the first sector upgrade since August 2017, highlights Macquarie, with earnings estimate upgrades of 11.6% for the month. Things were that dire in 2020 that earnings estimates for the Retail universe were downgraded by an average of -6% every month.
The performance of Retail threw into sharp relief that of Staples, which was downgraded by -8.6% for earnings estimates in February albeit slower than the January decline of -10.4%. This compares to the ASX200 which saw earnings estimates downgraded overall by -7.5% in February.
Consumer sector – individual stocks
The biggest movers for the month were a2 Milk Co ((A2M)) falling by -16% and Coles Group, down -14%. Meanwhile, Webjet climbed 16% on optimism around a travel recovery.
Within the consumer sector Retail was the key laggard down -9.4%, with falls for Kogan.com -22%, JB Hi-Fi ((JBH)) -13% and Wesfarmers down by -8%.
Travel stocks rallied during reporting season. As mentioned above, Webjet rose 16%, Flight Centre ((FLT)) 18% and Corporate Travel Management by 22% as the global vaccine drove positive sentiment.
Within Discretionary the broker prefers Harvey Norman ((HVN)) over JB Hi-Fi, given the potential for strong housing turnover to support renovation activity and improving regional conditions.
During February, Corporate Travel Management, IDP Education and Flight Centre led in the Discretionary sector, offsetting declines in Kogan.Com, JB Hi-Fi and Wesfarmers. Macquarie remains positive on Flight Centre (Outperform) given optimism around a travel recovery and increasing cost-out.
In the Food & Beverages sector the analyst favours Domino’s Pizza Enterprises ((DMP)) due to its offshore expansion.
Australian ten-year bond yields rose to 1.88% despite the Reserve Bank’s commitment to yield curve control and forecast of no cash rate hikes until at least 2024. The recent move in ten-year nominals is the largest since the initial brief covid-driven bond sell-off in March 2020 and, before then, the 'taper tantrum' in 2013.
UBS notes the shape of the current Australian Commonwealth Government bond curve implies a steep RBA tightening cycle. Bonds yields have been rising on higher inflationary expectations, driven by an appreciating currency, higher commodity prices and expectations surrounding large US fiscal stimulus.
Global bond yields rose, with the US ten-year government bond yield rising 37 basis points to 1.46%. Australian bonds sold off by more than the US counterparts, which increases the spread between Australian and US bond yields by 0.38% to 0.42%.
Interest rate analysts at Shaw and Partners believe current ructions in rate markets are more about a faster rate hike story than a taper/inflation fear story. There are signs indicating the market is testing the Federal Reserve’s resolve to control the yield curve.
The market expectation of the average level of inflation over five years, five years from now (or US 5y5y Overnight Interest Rates Swaps) are already at 2.15%. This is not that far from the 2.5% that the Federal Reserve believes is the long-term neutral rate of interest.
Australian interest rate futures markets have similarly surmised that the RBA will hike faster, notes Shaw.
The broker highlights the Fed is giving tacit approval to higher long-term interest rates. It’s considered this change occurred toward the end of February when St Louis Fed President Bullard almost encouraged the yield move. He said it was “appropriate" given the improvement in the inflation outlook and that the rise in bond yields "is a good sign”.
The US dollar index stayed relatively flat in February, while the Australian dollar closed the month at US$0.7706 — a rise of 0.8%.
Against the US dollar, the pound rose 2.2%, the New Zealand dollar 1.4% and the Australian dollar 1.3%, which were the best performing currencies, while the Swiss franc -2.1%, Japanese yen -1.8% and Swedish krona -0.9% were relative underperformers.
Some of the movement in currency can be explained by a slight rebound in investor risk-on sentiment, highlights UBS.
Brent Oil prices rose $10.25/bbl to $66.13/bbl, partly driven by the reflation trade and vaccine optimism.
Iron ore prices surged to $US174/t, rising by $US16/t.
Gold prices fell -$US120.95/oz to $US1,742.85/oz.
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