Australia | Jun 04 2021
During May net earnings revisions were positive for the ninth straight month, propelling the ASX200 2.3% higher, with the bank sector leading the way.
-The ASX200 climbed 2.3% during May
-Value outperformed growth and large caps outpaced small caps
-Banks were the best performing sector, Technology the worst
-Stock picks for the Technology and REIT sectors
By Mark Woodruff
The ASX200 rose 2.3% in May, outperforming the 0.7% rise in the S&P500, while the Nasdaq fell -1.4%. The gains in the Australian market were driven by large caps, with the ASX50 outpacing the Small Ordinaries over the month.
The gap to pre-covid expectations continues to close with FY22 EPS levels now -3% below that high watermark. The Banks and Resources sectors continue to drive both the earnings pulse and index performance year-to-date.
Global Value outperformed Growth in May, driven by arally in Energy and Financials. The largest move was in US Value, which outperformed its Growth counterpart by 422 basis points. Australian Value outperformed Growth by 101bps, while the EU was the only region to see Growth outpace Value.
Globally, since the end of October 2020, Value has outperformed by 14.0%, while Value in Australia has outperformed by 30% over the same period.
Banks were the best performing sector and Technology was the worst. In a tilt to quality, Healthcare returned to a positive contributionwhilst Energy remains the clear laggard.
Emerging markets outperformed developed markets for the first time since January, with strong performances from India and Russia, rising by 6.4% and 7.9%, respectively.
Australian sector performance
Banks were the best performing sector, up by 7.3% overall, led by Commonwealth Bank of Australia ((CBA)), which rose by 12% and Westpac Bank ((WBC)) increased by 5.8%. All the major banks provided trading updates in May, with lower impairments driving earnings upgrades across the sector.
In fact, every bank in the ASX300 saw FY21 earnings upgraded in May, and rising earnings accounted for 70% of the sector's return last month.
In Morgan Stanleys view, major bank price earnings multiples can continue to trade above long-run averages given low interest rates, an ongoing earnings upgrade cycle, rising dividends, stronger capital ratios and a lower risk profile.
Technologywas the worst performer falling by -9.9%, with a substantial fall for EML Payments ((EML)) of -41.9%, Afterpay ((APT)) -21.1% and Appen ((APX)) declining by -14.4%. On the flipside, Computershare ((CPU)) rose by 10.6%. This is a stock that normally outperforms when bond yields rise, notes Macquarie.
Utilities were also poor performers, with a -4.3% decline over the month. The falls in both the Technology and Utilities sectors were driven more by lower earnings than lower price earnings multiples, explains the broker.
Australian Value, with a rise of 3.7%, outperformed Growth which rose 2.2%in May, with the rise in inflation negatively impacting some long duration growth stocks (e.g. Technology).
While the RBA and the Federal Reserve are currently reluctant to talk about tapering, investors may be favouring Value on the expectation that stocks with shorter duration cash flows would outperform if bond yields spike after a tapering announcement. Thisoccurredin 2013, notesMacquarie.
Where to now?
A continued bias higher in bond yields and the corollary of higher discount rates continues to pressure asset allocation away from growth trades and long-duration positioning.
So whilst the deep value opportunity has largely passed, a broader reflation exposure makes sense to Morgan Stanley. In Australia, this can continue to be played through select Materials exposure, with a laggard opportunity in Energy.
The broker also suggests fiscal policy beneficiaries will likely be supported, while Banks and Diversified Financials also retain Value credentials.
However, a risk to earnings momentum is rising costs, supply chain friction and labour shortages. This environment has been evidenced in global markets and is now a building theme in Australia. Morgan Stanley expects this to feature more prominently in FY21 results, with the breadth of cause, and magnitude of effect, yet to be fully priced-in.
While earnings changes were a key driver of returns, the outperformance of banks along with poor returns from Technology and Utilities is consistent with a market positioning for rising bond yields, explains Macquarie. This is despite the fact the bond yields fell slightly over the month.
The market appears to be reacting more to strong inflation data though there is ongoing debate as to the duration of inflation pressures.
The 10% rise in the gold sub-sector is consistent with rising inflation. While the broker believes bitcoin is a risk asset, there are some who believe it is digital gold, and so, the -36% fall in bitcoin may have benefitted gold inflows.
So far a spike in treasury yields has seen a consolidation though not a declinein the Nasdaq.
US industry technology bellwethers still look solid as forward revenue estimates keep ticking up though multiples are flat. However, if the dotcom era is anything to go by, there appears a lag of rate hikes and stock market declines, notes Credit Suisse.