Australia | May 06 2021
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During April the ASX200 recorded a seventh consecutive monthly rise with the technology and resources sectors leading the way.
-The ASX200 climbed 3.5% during April
-Growth marginally outperformed Value
-The BBG Commodities Index rose 8.3% across the month
By Mark Woodruff
Equity markets continue to enjoy an outstanding start to 2021, with returns well ahead of average. At a global level, this trend is underpinned by ongoing fiscal stimulus and persistently accommodative monetary policy.
Locally, earnings revisions appear firmly in upgrade territory, while dividends have gathered momentum with consensus projections now up 16.7% in the year-to-date. Additionally, business and consumer surveys are pointing to strong and growing confidence.
Meanwhile, the Bloomberg Commodities Index has climbed by 15.22%. This is 12.8 percentage points above the typical year-to-date average since 1970.
During April, the ASX200 rose 3.5%, lagging the 5.3% rise for the S&P500 in the US. For the second month in a row, growth stocks outperformed value (though only marginally), supported by a fall in bond yields. If one looks beyond value and growth toward other MSCI factor indices, the stronger returns were in Momentum, which rose 6.7%, High Dividend Yields 6.3% and Quality which increased by 5.8%.
On the world stage, developed markets outperformed emerging markets by 2.2% in April, led primarily by the US, with the S&P500 increasing by 5.2% and the Nasdaq rising by 5.4%. Other MSCI country returns in local currency were the United Kingdom up by 4.0%, Europe ex-UK increasing by 2.1% and Japan falling -2.6%.
In Australia large caps trailed the market, with the ASX50 up 3.2% compared to a 5.0% rise in the Small Ordinaries. This contrasts with the US market, where the small cap Russell 2000 underperformed by over 300 basis points.
To put the month of April into perspective, equity markets have enjoyed a very strong start to 2021, with the MSCI All World index gaining 8.39%, which is well ahead of the average of the first four months of the year since 1990, which stands at 3.19%. Locally, the picture is similar for the ASX200, which has delivered a year-to-date return some 368 basis points above the average since 1994.
Australian sector performance
Technology was the best performing sector, with a gain of 9.7%, largely driven by the decline in Australian bond yields, which fell around -10 basis points over both March and April. Afterpay ((APT)) climbed 15.9%, Altium ((ALU)) rose by 12.0% and Xero ((XRO)) increased by 11.9%.
The Metals & Mining sub-sector was also a strong performer in April, up 6.8% driven largely by stronger metal prices and a slightly weaker US dollar. The best performing exposures in mining pertained to lithium. Galaxy Resources ((GXY)) rose 55.3%, Orocobre ((ORE )) 41.8%, Mineral Resources ((MIN)) 25.6%, and IGO Ltd ((IGO)) increased by 19.3%.
Iron ore miners were strong with Fortescue Metals Group ((FMG)) rising 13% and Rio Tinto ((RIO)) 9.4%. Steel also rose with BlueScope Steel ((BSL) up 11.7%. Gold miners such as Chalice Mining ((CHN)) were up 32.9%, Evolution Mining ((EVN)) climbing 13.5% while Newcrest Mining ((NCM)) rose 8.6%, in part due to lower bond yields.
Energy was the worst performer in April, down -4.9% on the back of the rise in the Australian dollar and fall in oil prices, with Brent falling -5.8%. Beach Petroleum ((BPT)) and Origin Energy ((ORG)) down -25.7% and -11.3%, respectively, were the key drags on the index, with both having negative earnings surprises.
Consumer Staples was also a laggard, down -2.5% with similar falls for Food & Beverage and Staples Retail.
In the ASX100, the largest falls were The a2 Milk Co ((A2M)) down -7.8% and Woolworths ((WOW)) falling -3.8%. Several smaller companies also posted material falls including Bubs Australia ((BUB )) down -10.9%, Sigma Healthcare ((SIG)) -10.3% and Blackmores ((BKL)) falling -10.2%.
In terms of indices, the Small Ordinaries Accumulation index was up 5.0% in April, outperforming the ASX100 by 1.5%. Small Industrials were up 3.9%, outperforming the ASX100 Industrials by 0.9%. Small Resources were up 9.5%, outperforming the ASX100 Resources by 3.9%.
In terms of sectors, Materials was the best performing, rising by 6.7%, followed by Information Technology up 6.4% and Financials increasing by 4.9%. Energy was the worst performing sector over the past month, returning -4.3%, followed by Consumer Staples down -2.0% and Consumer Discretionary up 0.4%.
Within the Small Ordinaries, the best stocks were Galaxy Resources rising by 55.3%, De Grey Mining ((DEG)) 48.2%, Orocobre 41.8%, Chalice Mining 32.9%, Accent Group ((AX1)) 30.7% and Megaport ((MP1)) increasing by 29.7%.
The worst performers were Coronado Global Resources ((CRN)) falling by -33.9%, Whitehaven Coal ((WHC)) -27.5%, Nuix NXL -19.8%, Redbubble ((RBL)) -18.2%, New Hope ((NHC)) -15.1% and Telix Pharmaceuticals ((TLX)) decreasing by -12.6%.
In terms of top and bottom picks among emerging companies, JP Morgan likes Tyro Payments ((TYR)). The company reported a strong recovery in merchant acquisitions over March and minimal churn to-date. After a terminal outage in January, 2021, JP Morgan believes short-term investor concerns will now be alleviated. There’s also considered to be ample room to continue growing through its merchant acquisition strategy. On the flipside, Flight Centre ((FLT)) is the bottom pick with an Underweight rating though the broker has recently taken a more positive view.
The technology sector
Within the ASX All Technology Index rose 9.4% during April, while WAAAX stocks rose 12.8%. In the US the Nasdaq100 Technology index rose 3.2% though underperformed the rest of the market.
The broker sees rising rates as presenting a risk regarding sector rotation away from technology. However, there are considered to be multiple companies with strong, multi-year compounding growth outlooks which can continue to perform well.
REITs had a month of gains rising by 2.9% though still slightly underperformed the broader ASX200 by -0.6%.
As at April 30, the sector was offering a forecast total shareholder return (TSR) of 6.3%, including a 4.1% DPS yield, based on an average circa 72% payout. The yield spread over bonds was 2.4%, and while this spread has narrowed, it remains above the 2.0% longer-term average.
Retail-exposed names had a relatively weak month, with fund managers and metro-office exposed REITs the relative outperformers.
In statistics during the month, the March quarter residential market data highlighted robust new sales and pricing growth. Separately, limited retail sales data for the sector showed moderating/normalising trends for Supermarkets, while Specialty sales slowly recover from post-covid lows.
While REITs have slightly outperformed the ASX over the last 12 months, Credit Suisse highlights the elevated 12-month returns need to be put into perspective. One must take into account that March 2020 represented a covid nadir for the REIT sector.
Outperformers for the month included Home Consortium ((HMC)) up by 13.6%, Centuria Office REIT ((COF)) 9.5%, and Charter Hall Group 8.7%. Finally, both Abacus Property Group ((ABP)) and Shopping Centres Australasia Property Group ((SCP)) rose by 7.8% .
Credit Suisse’s proprietary market-cap weighted index of ASX-listed contractors increased 8.4% across the month of April. The index comprises listed contractor names with market capitalisations of over $150m. This monthly performance compares to the ASX200 index which increased 3.5%. This is the first month of relative outperformance since January, 2021.
In April, most of the contractor names rose as the market begins to look through a challenging period characterised by covid-related project delays, operational disruptions and decaying work-in-hand, with limited major project awards. Credit Suisse continues to think volatility in the operational environment is likely in the near term. However, the solid April performance illustrates the market’s increased confidence around the recovery profile post-covid and a crystallisation of the opportunity pipeline.
A common theme of some investor days held by contractors during the month was the improving outlook and solid pipeline of opportunities complimented by fiscal stimulus and favourable macro-economic trends.
A list of Credit Suisse’s key sector catalysts includes the tangible progress of an east coast infrastructure pipeline and evidence that the covid-related labour-induced margin pressures are transitory. Additionally, there is increased likelihood of merger and acquisition activity. At a time where there’s considered to be no evidence of imminent peak cycle conditions, there are several small cap contractors trading on low multiples.
The broker’s top pick remains Seven Group Holdings ((SVW)). Towards the end of April, the company raised $550m in equity. This was done to reduce debt, preserve balance sheet flexibility and increase the free float. Given that there isn’t a gearing issue that warrants balance sheet repair, Credit Suisse believes the raising was driven with future M&A aspirations in mind.
Again in late April, Downer EDI announced a buyback of around $400m, on the back of confidence in the outlook and improvement to the balance sheet. The broker sees FY22 as a year of delivery.
Finally, the broker also has an Outperform rating for Alliance Aviation Services ((AQZ)). The mid-February interim result showed rapidly improving unit economics, excellent cash conversion and increasingly simpler accounts.
Bonds and Commodities
After the spike earlier in the year, Australia’s bond yields have moved sideways. The Australian ten-year fell -4 basis points to around 1.80%, while the US ten-year yield fell -11 basis points.
Commodities prices strengthened in April on a net basis. Iron Ore rose 14.0%, but Brent crude fell -5.8%.
Copper has had a good year rising around 30%, and resumed the uptrend in April by climbing 12% after consolidating in March.
The BBG Commodities Index rose 8.3% across the month, with precious metals making ground for the first time this year.
Gold gained 3.6% for the month though remains stuck between US$1,760-$1,800/oz, failing to stage a clear technical break in either direction, with US ten-year yields stalling around 1.6%. The still low level of yields and strength of growth momentum makes it hard for Macquarie to envisage a significant pullback, and hence a rally in gold prices.
The broker still expects US ten-year yields to track incrementally higher towards 2%, pushing gold progressively down below $1,600/oz. For gold to push sustainably higher would likely require a worsening covid scenario or a sustained inflationary uplift, where the market doubts the Federal Reserve was either able or willing to put back in its box.
As for higher yields, the market’s pricing of the Federal Reserve’s tapering remains key.
During April the Australian dollar gained 1.6% while the US dollar index fell -1.4%.
The Brazilian Real (BRL) was the strongest currency this month, appreciating 3.6%, while the Swiss Franc (CHF) was the second-best performing currency, appreciating 3.4%.
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