June In Review: ASX Drops In June, Outperforms Globally over FY22

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

While the ASX200 lost -8.8% (total return) over June, the index outperformed most developed and emerging market peers for FY22.

-The ASX200 lost -8.8% (total return) during June and -6.5% for FY22
-Energy outperformed in June while materials and financials dragged
-Over FY22 utilties and energy performed best, technology the worst
-The major banks lost -14% over June and -8.6% for FY22
-The CRB Commodity Index fell by -8% in June

By Mark Woodruff

Australian stocks lost -8.8% (including dividends) in June, pushing the ASX200 to a loss of -6.5% for FY22, the sixth worst financial year going back to 1983. Income returns of 4.1% for the financial year proved insufficient to offset negative price movements.

During June, the ASX200 underperformed the MSCI Developed Markets Index, which lost -8.6% in US dollar terms, driven by a -8.3% loss for the S&P500. 

However, the FY22 performance for Australia was relatively resilient with the ASX200 outperforming most Developed and Emerging Market peers, which Morgan Stanley attributes to a strong sector weighting for Resources.

JP Morgan partly credits the outperformance to a stronger relative macroeconomic backdrop, in particular record high terms of trade. In addition, the broker points out Australia continues to offer significantly higher dividend yields at 5.1%, versus 2.2% for Developed Markets.

At the beginning of the financial year, interest rate settings were still at stimulatory levels put in place at the height of the covid emergency. As more people were affected by covid (and then influenza), production was impeded, causing the supply of goods to fall short of demand.

Beginning in late February, the war in Ukraine only served to push the prices of some goods higher, especially fuel and energy commodities. As a result, central banks were forced into aggressive rate hikes to address soaring rates of inflation.

This central bank action led to higher bond yields, reflecting global and domestic economic recoveries from covid and higher global and domestic inflation, according to CommBank economists.

Ten-year government bond yields lifted from lows of 1.08% on August 23, 2021 to an eight year high of 4.19% on June 15, 2022 and ended the financial year at 3.66%.

Australia’s inflation expectations hit a 14-year high of 6.7% in June. According to the bank, these expectations, along with the job market and the path of the global economy, will determine the direction for longer-term interest rates over the coming year.

Economists at JP Morgan forecast the RBA cash rate will peak at 2.6% in November, and believe this outcome, along with moderating inflation, would be a clear positive for the Australian equity market.

June performance

A key driver of a weak performance by the equity market in June was a de-rating of market multiples that also occurred over the course of the financial year.

In addition, the RBA increased pressure on an already decelerating economy by raising the cash rate in June by 50bps to 0.85%.

This move contributed to a 32bps net rise in the Australian 10-year yield to 3.66%, while the US yield also increased by a net 13bps to 2.98% (having reached as high as 3.5%), as key inflation metrics continue to surprise to the upside.

All sectors of the sharemarket lost ground, apart from Energy and Consumer Staples which gained 2.2% and 0.2%, respectively. The worst performing sectors were Materials and Financials which lost -12.4% and -11.9%, respectively.

Growth outperformed Value in June by 2.3%, though on a 12-month basis Growth still lags.

Large cap indices outperformed the mid and small cap indices, with the Small Ordinaries Index losing -13.1%. Industrials outperformed Resources, with the spread greatest within small caps.

Commodity prices experienced a broad fall over the month. High US inventories saw Brent crude oil prices pull back, while iron ore prices dropped as China's economic downturn continues to impact demand and profit margins in domestic steel mills.

FY22 performance

The ASX200 was above 7,000 for most of the year but was dragged lower by the -8.8% decline in June to close at 6,568.

The Utilities and Energy sectors were the top performers in FY22, while Technology and Discretionary fell the most.

At an individual stock level, Woodside Energy Group ((WDS)) and BHP Group ((BHP)) were the top contributors to performance, while Morgan Stanley notes a significant downturn for bank share prices significantly weighed upon the index for the month.

The Australian dollar began the financial year around US75.00 cents and ended the year below US69.00 cents. The high for the year was US76.61 cents on April 5, 2022 and the low occurred just over a month later at US68.27 cents on May 12. 

Commbank finds it remarkable that higher commodity prices didn’t provide a bigger boost to the Australian dollar, as the Commodity Research Bureau (CRB) futures index lifted by 36% over FY22.

Over the past year the thermal coal price lifted by 186%, the natural gas price (Asian buyers) rose by 196%, cotton climbed by 40%, crude oil jumped by 44% and the wheat price was up by 30%.

However, the iron ore price fell by -40%, while base metals like aluminium, copper and lead all declined by up to -16%.

Banks

The major banks lost -14% (total return) over June compared to the -8.8% loss experienced by the ASX200, while a loss of -8.6% for FY22 was a little worse than the -6.5% loss for the ASX200.

During the financial year National Australia Bank ((NAB)) comfortably outperformed, while ANZ Bank ((ANZ)) and Westpac Bank ((WBC) materially underperformed, points out Morgan Stanley.

Since the start of the RBA tightening cycle, the major banks’ share prices have fallen by around -17%.

Over June, Westpac Bank lost -18.3%, CommBank ((CBA)) -13.4%, Bendigo & Adelaide Bank ((BEN)) -13%, National Australia Bank -12.4%, ANZ Bank -12% and Bank of Queensland ((BOQ)) lost -11.2%.

While banks are still "cheap" by comparison to relative yields versus the ASX Industrials ex Banks since 2010, Morgan Stanley notes the excess yield versus the 10-year bond yield has fallen to around 2.6% (given the move-up in long end rates) and is now below the average of around 3.1%.

The small ordinaries

The Small Ordinaries Accumulation Index lost -13.1% in June, underperforming the ASX100 by -4.6 percentage points.

The best sector performance came from Telecommunication Services which lost -4.7%, followed by Health Care and Consumer Staples which lost -7.0% and -7.2%, respectively.

On the flipside, Materials lost -23.6% and the next worst performing sectors were Information Technology and Financials which lost -12.8% and -12.7%, respectively.

At the individual stock level (according to JP Morgan data) Tassal Group rose 40% versus the index, Sigma Healthcare 26% and Audinate (rose by 23.7% versus the index.

Worst performers relative to the index were BWX -42.2%, Zip Co -41.9% and Novonix fell by -34.2%.

REITs

REITs underperformed the ASX200 in June and lost -10.3%, with the RBA’s surprise 50bp interest rate hike and continued strength in overseas CPI figures weighing on sector sentiment, according to JP Morgan.

Over FY22, ASX200 REITs lost -12.3%, underperforming the broader market which lost -6.5% over the same period.

None of the ASX200 REITs generating a positive return in June.

Outperformers for the month included Arena REIT ((ARF)) which was unchanged, Cromwell Property Group ((CMW)) -2.4%, Vicinity Centres ((VCX)) -2.9%, Ingenia Communities Group ((INA)) -3.2%, BWP Trust ((BWP)) -3.6% and HomeCo Daily Needs REIT ((HDN)), which lost -3.7%

Underperformers for the month included Home Consortium ((HMC)) which lost -19.5%, Centuria Industrial REIT ((CIP)) -16.8%, Charter Hall Group ((CHC)) -16.6%, Centuria Capital Group ((CNI)) -15.1%, Dexus ((DXS)) -12.7% and Goodman Group ((GMG)) which lost -12.5%.

Until some form of stabilisation of the long bond occurs, preferably in combination with lower future cash rate expectations, JP Morgan feels investors will lack confidence when valuing commercial real estate and REITs.

Credit Suisse believes investors (particularly overseas) are starting to see value in the Australian REITs sector.

However, the broker feels there could be net downgrades to consensus earnings forecasts during the August reporting season due to rising funding costs, and there could be downside risk for many REITs in FY23 from falling asset valuations.

The analysts prefer Vicinity Centres ((VCX)) over Scentre Group ((SCG)) in Retail due to its lower gearing and continue to like Stockland ((SGP)) in the diversified space based on its FY23 earnings outlook. Mirvac Group ((MGR)) is also estimated to be cheap on a longer-term view.

From among the fund managers, the broker prefers Goodman Group ((GMG)) and recommends Lendlease Group ((LLC)) for patient investors.

Interest rates

In the US, the 10-year treasury yield rose by 13bps to 2.98%, as the key economic data release of US CPI reported an 8.6% year-on-year rise, the fastest increase since 1981, points out UBS.

Meanwhile, in Australia the 10-year bond yield climbed by 32bpts to 3.66% as the Reserve Bank raised the cash rate by 50bps to 0.85%, and as investors priced-in further tightening of monetary policy.

UBS expects the RBA to hike the cash rate by 50bps in August (the broker correctly forecast 50bps on July 5), and then by 25bps each meeting until pausing at 2.6% in November. Cuts in the second half of 2023 are then expected.

Commodities

The CRB Commodity Index fell by -8% to 291 in June.

Brent crude oil fell by -6.5% to US$114.8/bbl.

The iron ore price fell by -11.9% to $US122/t.

The gold price decreased by -1.6% to US$1,807/oz, as rising global rates remain a headwind, because the opportunity cost of holding gold increases. On the other hand, holding gold for diversification is considered a potential tailwind as recession fears increase.

Hard coking coal prices fell by -22.6%, while thermal coal decreased by -9.6% during June.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, rose by 2.9% to 104.69.

The Australian dollar closed out June at US68.88 cents, down from US71.77 cents at the end of May.

The currency lost -8.4% against the US dollar over the financial year, more a reflection of a stronger greenback, explains CommBank. The US dollar is just shy of 20-year highs, having risen 13.4% over 2021/2.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms