June In Review: FY21 Closes With Eleventh Monthly Gain

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Gains for the technology sector spurred a 2.3% rise for the ASX200 in June, the eleventh month of gains for a financial year that returned 27.8%.

-The ASX200 climbed 2.3% during June and the FY21 total return was 27.8%
-In June Technology was the best sector while Financials dragged
-Over FY21 Consumer Discretionary was strongest as Value outpaced Growth
-The average return for the major banks was 52% in FY21
-FY21 commodity prices jumped on average 55%
-Stock and sector picks for the new financial year

By Mark Woodruff

Australian stocks rose 2.3% in June, lifting the ASX200 total return in FY21 to 27.8%, the strongest increase since the 28.7% return in 2006.

Despite this, the ASX still lagged global markets. Global equities rose 35.8% though the falling US dollar would have reduced global equity returns to 27.5% if left unhedged.

The ASX200 underperformed the technology-heavy S&P500 by -14 percentage points (ppt) over FY21 and the MSCI ACWI by -9ppt. The latter is designed to represent the performance of large and mid-cap stocks across 23 developed markets and 27 emerging markets. Due to Brexit, the key laggard in global stocks was the UK, which the ASX200 outperformed by 10.8ppt.

Over the financial year, the rapid economic recovery, sustained policy support and return of capital allocation all saw the index move higher on a sustained basis, with September the only down-month. 

The rapid economic recovery from the crisis has seen earnings expectations regain pre-covid levels, with stimulus sustaining elevated multiples.

June performance

In June, Technology was the best ASX sector, rising 13.4%, with returns supported by a decline in bond yields, despite a hawkish shift by the Federal Reserve during the month. The next best performance came from Communications and Staples, increasing by 5.6% and 5.3%, respectively.

Financials were the weakest sector in June, falling -0.2%, dragged down by the Banks (-1.3%) though the sector had previously outperformed after bank trading updates in May. Without a similar catalyst, the decline in bond yields in June was likely a drag on returns, notes Macquarie. Not all Financials did poorly in June, with Diversified Financials rising 3.9%.

Industrials outperformed Resources across all-size indices with mid-cap Industrials the best performing, rising by 5.9%. 

Overall, large-caps increased by 1.9% for the month, which underperformed the mid and small caps performance of 3.7% and 3.1%, respectively.

FY21 performance

Over FY21, Consumer Discretionary (46.1%) and Financials (40.6%) were the leaders of performance. 

Within Consumer Discretionary, Autos was the strongest sub-sector, increasing by 86% as the pandemic drove a shift of demand in favour of private vehicles over public transport. Consumer Services was next best in Discretionary, rising by 53%, led by Domino’s Pizza Enterprises ((DMP)) 77% and Aristocrat Leisure ((ALL)) up by 70%.

More important for the Australian market were the big gains in the banks sub-sector. The major banks and BHP Group ((BHP)) added the most to index performance at a stock level, with the a2 Milk Co ((A2M)) the biggest detractor.

Utilities was the weakest sector over the last financial year, lagging the index by -46ppt. The sector faced multiple headwinds over the last year, including low power prices, ESG concerns related to the energy transition and the valuation headwinds caused by the rise in bond yields.

Cyclical sectors outperformed defensives by 28ppt in FY21, supported by the recovery and expansion phases of the cycle. Macquarie believes the cycle is slowing, which typically shifts performance in favour of defensives.

The last financial year also favoured Value, which outpaced Growth by 23.6ppt. This was supported by a strong cyclical recovery, positive vaccine news and the Democrat’s clean sweep in the US Election, explains the broker. A boost also came from the combination of stronger inflation and higher bond yields compared to a year ago. That said, growth outperformed by 2.8ppt in June, driven mainly by gains in technology stocks.

Commodity prices jumped on average 55% as supply pressures and a return of industrial demand saw most markets tighten. Gold was the only commodity to lose ground, as investors became less risk-averse.

Returns in defensive assets were negligible with cash rising by 0.1% and fixed income -0.8%. Returns for both would have been eroded by inflation. However, floating-rate and inflation-linked securities returns were more appealing.

ASX100 best and worst performers in FY21

The ASX100 top performers for FY21 were Lynas Rare Earths ((LYC)), which jumped by 199%, Mineral Resources ((MIN)) 162%, Reece ((REH)) 158%, Nine Entertainment Co ((NEC)) 116% and OZ Minerals ((OZL)), which rose by 107%.

The bottom performers for the ASX100 were the a2 Milk Company ((A2M)) which fell -68%, AGL Energy ((AGL)) -47%, AMP Ltd ((AMP)) -29%, Northern Star Resources ((NST)) -25% and Origin Energy ((ORG)), which fell by -18.9%.

Emerging companies

The Small Ordinaries Accumulation index was up 3.1% in June, outperforming the ASX100 by 0.9%. Small Industrials were up 3.9%, while Small Resources were down -0.4%.

Energy was the best performing sector, up 7.6%, followed by Healthcare 7% and Information Technology rising by 5.2%. Materials was the worst performing sector over the past month, returning -0.5%, followed by Industrials up 1.7% and Real Estate rising by 2.2%.

The top small industrial performers in the month included Telix Pharmaceuticals ((TLX)) rising by 31%, Marley Spoon ((MMM)) 29% and Bubs Australia ((BUB) increased by 26%.

The worst small industrial performers included Nuix ((NXL)) falling by -24%, Genworth Mortgage Insurance ((GMA)) -24% and Brainchip Holdings ((BRN)) declined -22%.

The top small resources performers in the month included Piedmont Lithium ((PLL)) rising by 25%, and Alkane Resources ((ALK)) 24% and Whitehaven Coal ((WHC)) increased by 26%.

The worst small resources performers included De Grey Mining ((DEG)) falling by -20.2%, Gold Road Resources ((GOR)) -18% and Westgold Resources ((WGX)) declined -17%.

The Technology sector

Technology was the best ASX sector in June rising by 13.4%, while the ASX technology index was up 10.3% versus the ASX100 increase of 2.0%. WAAAX stocks rose by 16.5%, while in the US the Nasdaq100 technology index increased 8.1% for the month.

Within the ASX technology index, the best performers included Altium ((ALU)) jumping 30%, Marley Spoon 29% and Yojee ((YOJ)) climbed by 28%.

Macquarie notes Computershare’s ((CPU)) performance, with a 7.6% gain in June. This backs-up the 10.6% rise in May, when the Technology sector was down -10%.

The worst performers in the ASX Technology Index included Digital Wine Ventures ((DW8)) falling by -29%, Laybuy Group ((LBY)) -26% and Cirralto ((CRO)) down by -23%.

Within Credit Suisse’s technology sector coverage the order of preference among those with an Outperform rating are Xero ((XRO)), Life360 ((360)), Audinate ((AD8)), Altium, Iress ((IRE)) and Infomedia ((IFM)).

Sector rotation from technology is a risk, due to rising rates. However, the broker sees multiple companies under coverage with strong, multi-year compounding growth outlooks, which can continue to perform well.

Within travel names there’s considered upside for Corporate Travel Management ((CTD)) and Webjet ((WEB)), as global travel resumes in late 2021 and into 2022. Flight Centre ((FLT)) will also benefit from this thematic. However, due to longer-term Leisure division concerns it is the broker’s least preferred exposure in travel.

Australian Banks

The major banks had a very strong year, but they underperformed the ASX200 in June. 

During the 2021 financial year, the average return of the major banks was 52% and regional banks climbed 56%. ANZ Bank ((ANZ)) and Bank of Queensland ((BOQ)) were the best performers.

In June, the average total shareholder return of the major banks was -1.7%, falling behind the ASX200 performance of 2.3% in June. Commonwealth Bank ((CBA)) rose  0.2%, which was ahead of the -2% fall for ANZ Bank, -2.3% for Westpac ((WBC)) and -2.7% for National Australia Bank ((NAB)).

The regional banks fared best with Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland rising 1.4% and 1.8%, respectively.

Morgan Stanley believes the banks will continue to outperform the ASX200, given a continuing earnings upgrade cycle, a better outlook for revenue growth, and large capital management prospects. Additionally, they have a lower overall risk profile and relative valuation appeal. Within the sector, the broker expects an increasing focus on company-specific operating performance.

Financials ex-banks

Financials ex-banks outperformed the market in June. Afterpay ((APT)) was up 32%, in part on Paypal raising BNPL prices and US affiliate partnerships. Computershare was up 7.6%, and is Morgan Stanley’s top pick for rate leverage. 

Magellan Financial Group ((MFG)) rose 9% though the broker thinks its retail flows remain under pressure, while Macquarie points out the group benefits from stronger returns from technology stocks and a stronger US dollar.

Australian consumer sector

The Consumer sector outperformed the ASX200 in June, as Retail led with a 6.4% gain for the month, closely followed by Staples, up by 5.3%.

Within Staples, Inghams Group ((ING)) and Metcash ((MTS)) were the strongest, up around 13%, with Bega Cheese ((BGA)) and Costa Group ((CGC)) the only underperformers.

In terms of outlook, Macquarie has switched to favouring Coles Group ((COL)) over Woolworths ((WOW)) within Staples. As for Discretionary, Outperform ratings are maintained for Wesfarmers ((WES)) and Harvey Norman ((HVN)), as they continue to benefit from strong housing activity. 

In Travel, the broker maintains an Outperform on Flight Centre and Webjet, as the global vaccine rollout continues and both balance sheets are considered strong enough to sustain current volatility.

REITs

REITs ended the financial year up 33.2%, outperforming the ASX200 by 5.4%, while the outperformance in June was 3.6%. Over the past 12 years, REITs have outperformed equities in eight out twelve years.

Globally REITs have returned 27.7% in the last 12 months, with the developed markets return of 30.4%, significantly outperforming the emerging markets return of 6.6%.

In Australia, Outperformers in June included Home Consortium ((HMC)), which rose by 14.8%, Ingenia Communities Group ((INA)) 10.0%, Charter Hall Group ((CHC)) 9.7%, Goodman Group ((GMG)) 9.7% and Growthpoint Properties ((GOZ)) increasing by 8.3%.

Underperformers for the month included Lendlease Group ((LLC)) falling by -6.8%, National Storage REIT ((NSR)) -2.7%,  Cromwell Property Group ((CMW)) -1.5% and Scentre Group ((SCG)) edging up by 0.7%.

Outperformers over the 12 month period included Home Consortium lifting by 103%, Arena REIT ((ARF)) 71.1%, Charter Hall Group 64.1%, Centuria Capital Group ((CNI)) 61.5%, and Aventus Group ((AVN)) up by 59.1%.

Meanwhile, underperformers for this period were Lendlease Group down by -5.9%, Cromwell Property Group rose 5.0%, Waypoint REIT ((WPR)) 6.7%, GDI Property Group ((GDI)) 7.4% and National Storage REIT up by 12.3%.

In news during the month, a majority of REITs have announced revaluations, with cap rates tightening -25bps on average.

Nominal Australian ten-year bond yields tightened -18bps across June to 1.53%, reflecting greater market confidence that long-term inflation can be contained, explains JPMorgan. Ten-year real bond yields, more relevant for property and REIT pricing, ended the month down -6bps to 0.53%.

Revaluations to date have generally been better than Credit Suisse expected. It was not considered surprising that Industrial portfolios achieved meaningful valuation uplift of around 10-11% relative to the December 2020 level, largely due to cap rate compression. Neighbourhood Retail was also stronger and Regional malls were weaker, but not by as much as expected/implied by the market.

Office values trended slightly higher and alternative sectors like childcare, as well as long WALE (weighted average lease expiry) retail also achieved healthy gains over the half year.

Credit Suisse’s sector forecast is for a total shareholder return (TSR) of 3.0%, including a 4.1% dividend yield on a weighted-average basis, being an around 2.5% spread over the ten-year bond.

The sector yield spread over bonds remains above the longer-term average of circa 2.0%.

In theory, this spread should be supportive of the sector, but the broker suggests investors will continue to favour REITs with strong balance sheets, favourable industry structure, and an earnings growth outlook.

Interest Rates

In June, the Federal Reserve’s hawkish turn precipitated sharp moves, including the flattening in the US yield curve, in the sharpest compression since January 15, 2021. There was an indication that tapering and ultimately tightening might be closer than previously envisaged. 

Rate strategists at JPMorgan expect the US yield curve to steepen by around 40bps into the year end, with a further 10bps of steepening into June 2022.

The Australian ten-year bond tightened -18bps across the month in the sharpest monthly compression since September 2020, ending the financial year at around 1.53%.

JPMorgan continues to forecast higher yields in the second half, with ten-year yields reaching 1.95% by the end of 2021. US economic outperformance and further tapering discussions are expected to drive real yields higher.

Commodities 

The CRB Commodity Index was up 3.7% for June.

Two of the most inflation and growth-sensitive metals fell, with gold down -7.2% to US$1770/oz, while copper fell -8.6%.

Iron ore was stronger in June, up 7.5% to US$215.5/t and Brent Crude rose 8.4% to US$75.1/bbl.

Thermal coal rose 13.3% for the month and 39.9% for the quarter.

Foreign Exchange

The US Dollar Index (DXY), a measure of the value of the US Dollar relative to a basket of foreign currencies, rose 2.9% during June. This was the largest uplift since the reaction to Donald Trump's election in November 2016.

In JPMorgan's estimations, a projected 40-50bpt  increase in US ten-year yields this year equates to a 6-7% increase in the US dollar.

The Australian dollar fell -3.1% for the month to land at US74.98 cents at financial year’s close.

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