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February In Review: ASX Outperforms

Australia | Mar 03 2022

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

Gains in the energy and materials sectors outweighed technology losses leading to a 2.1% total return for the ASX200 in February, as Australia outperformed global equity markets.

-The ASX200 gained 2.1% (total return) during February
-Value continued to outperform Growth
-Energy and materials were among was the best performing while technology remains out-of-favour
-JP Morgan predicts nine interest rate hikes in the US
in the next 12 months
-Australian 10-year bond yields climbed by 13 basis points to 2.14%

Mark Woodruff

The ASX200 closed out February with a total gain of 2.1% (including dividends).

From a wider perspective the index is still down -7.6% from a high reached in August last year.

The February performance of the Australian market was an outlier amongst global peers and outperformed the MSCI Developed Markets Index by 648 basis points (in US dollar terms). The S&P500 in the US fell -3% while Europe ex UK was down -4.3%. Meanwhile, the Nasdaq shed -3.4% bringing its year-to-date contraction to over -10%.

Since the beginning of 2022, markets have been roiled by fears of rising interest rates and mounting geopolitical tensions as Russia first threatened and then invaded Ukraine. These two forces have seen the MSCI World Index fall for two consecutive months, the first time since September and October of 2020.

More positively, JP Morgan draws upon history to suggest equity markets generally remain resilient in the aftermath of Federal Reserve rate rises and geopolitical tensions.

The local market received a significant boost thanks to the full inclusion of BHP Group ((BHP)) in the index following unification of its corporate structure, having abandoned its dual-listing with London. The Materials sector now accounts for 25.1% of the index, up from 19.2%, and the world's largest miner has taken over from Commonwealth Bank ((CBA)) as the largest weight in the index.

In Australia, the trend of Value stocks outperforming Growth was sustained.

Large caps fared best, reversing January’s losses while Mid-and-Small cap counterparts trended lower again.

In terms of sectors, Resources outperformed Industrials, with the Energy (8.65%) and Materials (5.25%) sectors performing strongly along with Staples (5.7%) and Banks (4%). Meanwhile, the Technology sector continues to be a drag, with the Discretionary sector also fading over the month.

On money markets, JP Morgan sits above market consensus in predicting nine interest rate hikes in the US and the US cash rate projected to peak at 2.75% in Q3 2023. For Australia only one interest rate increase is forecast by year’s-end, with a projected peak of 1% by Q3 2023. The differential between the two countries is evident in the extent to which companies referenced inflation during respective results seasons, suggests the broker.

Meanwhile, Morgan Stanley tells investors, that should geopolitical tensions begin to ease, they will most probably revisit the first six weeks of the calendar year. That was a period characterised by persistent inflationary signals, rising rates and the sustained resolve of central banks to normalise monetary policy settings.

On the local currency market the Australian dollar settled at US72.63 cents at February’s end, rising by 2.8% over the month.

Best and worst shares across indices

Within the ASX50, shares with the highest returns included South32 ((S32)) which gained 24.9%, Northern Star Resources ((NST)) 24.4%, Woodside Petroleum ((WPL)) 23.8%, Newcrest Mining ((NCM)) 19.6%, Cochlear ((COH)) 15.8% and Endeavour Group with a return of 14%.

Underperformers within the ASX50 were Xero ((XRO)) which lost -17%, Seek ((SEK)) -8%, Aristocrat Leisure ((ALL) -7.6% and Sonic Healthcare ((SHL)) which lost -7.7%.

For the Mid-Cap50 the highest return was achieved by Evolution Mining ((EVN)) with 22.9%, then came Challenger ((CGF)) 20%, Lynas Rare Earths ((LYC)) 14.3%, Vicinity Centres ((VCX)) 13.35% and BlueScope Steel ((BSL)) with a return of 12.1%.

On the flipside, Domino’s Pizza Enterprise ((DMP)) fell by -23.6%, Mineral Resources ((MIN)) -18.3%, Pilbara Minerals ((PLS)) -15.3% and Reece ((REH)) lost -10.9%.

Within the Small Ordinaries CIMIC Group ((CIM)) jumped by 34.8% (M&A), Sims ((SGM)) 28.1%, Silver Lake Resources ((SLR)) 25.9%, Perseus Mining ((PRU)) 25.4%, Nufarm ((NUF)) 23.1% and Whitehaven Coal ((WHC) gained 22.8%.

Underperformers included Life360 ((360)) which lost -36.6%, Novonix ((NVX)) -32.9%, Tyro Payments ((TYR)) -31.5%, Zip Co ((Z1P)) -30.1%, Telix Pharmaceuticals ((TLX)) -27.2% and Appen ((APX)) lost -27.2%.

Banks

The average total shareholder return of the major banks for February was 4.6%, which was ahead of the 2.1% total gain for the ASX200.

Westpac ((WBC)) and Bendigo & Adelaide Bank ((BEN)) were outperformers rising by 12.4% and 12%, while Commonwealth Bank ((CBA)) and ANZ Bank were the relative underperformers with returns of 1.5% and -2%.

According to Morgan Stanley, the average price/earnings-multiple-discount of the major banks, relative to the All Industrials ex-Banks, is around -35%, based on consensus estimates. This discount has narrowed from -43% in January.

As mentioned in last month’s January review, the only other time in the last 20 years this discount has been greater than -40% was during the initial covid turbulence in the June 2020 quarter.

The broker believes the February reporting season has reduced perceptions of downside risk for the banking sector, providing some comfort that margin and revenue headwinds will moderate during 2022. It’s felt this may end the brief (though significant) EPS downgrade cycle which caused share price underperformance in late 2021.

REITs

During February, REITS provided a total return of 1.84%.

Outperformers for the month included HomeCo Daily Needs REIT ((HDN)) which climbed by 18%, Vicinity Centres 15.1%, Irongate Group ((IAP)) 12.1% and Arena REIT ((ARF)) which gained 10%.

Underperformers for the month included Home Consortium ((HCM)) which fell by -5.2%, Rural Funds Group ((RFF)) -4.5%, Ingenia Communities Group ((INA)) -3.5%, Goodman Group ((GMG)) -3.1% and Centuria Industrial REIT ((CIP)) which retreated by -1.8%.

Within the large cap diversified REITs, Credit Suisse prefers Mirvac Group ((MGR)) and Stockland ((SGP)). Among the fund managers, the broker likes Goodman Group and Charter Hall Group ((CHC)). Meanwhile, Scentre Group ((SCG) is the preferred option in large cap retail and Centuria Office REIT ((COF)) in the small/mid-cap space.

The broker points out that at February 28, Australian REITs offered a forecast 12-month total shareholder return of 14.9%, inclusive of a 4% dividend yield.

Some general takeaways for Credit Suisse from the February reporting season included healthy balance sheets (with limited short-term refinance risk) and a less pronounced impact of covid upon rent collection and required rent relief.

Lastly, the broker points out how the REIT sector demonstrated during results that annual rental reviews act as a hedge against inflation.

Interest Rates

In the US, the 10-year treasury yield rose by 3bpts to 1.83%, while in Australia the10-year bond yield climbed by 13bpts to 2.14%.

In the US, futures market pricing shows an aggressive seven rate hike expectation by the Federal Reserve in the next 12 months (before Russia invaded Ukraine). Markets are also pricing steep rate hikes by the Reserve Bank of Australia (both before and after Ukraine).

Commodities

The CRB Commodity Index rose by 5.5% to 269 in February.

Brent crude oil increased by 10.7% to US$101/bbl.

Iron ore prices settled back down -5.7% to $US139.5t.

The gold price increased by 6.2% to US$1,909/oz.

It also was another good month for hard coking coal and thermal coal, rising by 5.4% and 23.2%, respectively.

Foreign Exchange

The US Dollar Index (DXY), a measure of the value of the US Dollar relative to a basket of foreign currencies, closed up 0.2% to 96.71.

And finally, the Australian dollar rose by 2.8% to close out February at US72.63 cents.

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CHARTS

360 APX ARF BEN BHP BSL CBA CGF CHC CIM CIP COF COH DMP EVN GMG HDN IAP INA LYC MGR MIN NCM NST NUF NVX PLS PRU REH RFF S32 SEK SGM SGP SHL SLR TLX TYR VCX XRO Z1P

For more info SHARE ANALYSIS: 360 - LIFE360, INC

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: ARF - ARENA REIT

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: CIM - CIMIC GROUP LIMITED

For more info SHARE ANALYSIS: CIP - CENTURIA INDUSTRIAL REIT

For more info SHARE ANALYSIS: COF - CENTURIA OFFICE REIT

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: HDN - HOMECO DAILY NEEDS REIT

For more info SHARE ANALYSIS: IAP - IRONGATE GROUP

For more info SHARE ANALYSIS: INA - INGENIA COMMUNITIES GROUP

For more info SHARE ANALYSIS: LYC - LYNAS RARE EARTHS LIMITED

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: NST - NORTHERN STAR RESOURCES LIMITED

For more info SHARE ANALYSIS: NUF - NUFARM LIMITED

For more info SHARE ANALYSIS: NVX - NOVONIX LIMITED

For more info SHARE ANALYSIS: PLS - PILBARA MINERALS LIMITED

For more info SHARE ANALYSIS: PRU - PERSEUS MINING LIMITED

For more info SHARE ANALYSIS: REH - REECE LIMITED

For more info SHARE ANALYSIS: RFF - RURAL FUNDS GROUP

For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SGM - SIMS LIMITED

For more info SHARE ANALYSIS: SGP - STOCKLAND

For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED

For more info SHARE ANALYSIS: SLR - SILVER LAKE RESOURCES LIMITED

For more info SHARE ANALYSIS: TLX - TELIX PHARMACEUTICALS LIMITED

For more info SHARE ANALYSIS: TYR - TYRO PAYMENTS LIMITED

For more info SHARE ANALYSIS: VCX - VICINITY CENTRES

For more info SHARE ANALYSIS: XRO - XERO LIMITED

For more info SHARE ANALYSIS: Z1P - ZIP CO LIMITED