July In Review: Growth Regains Leadership Over Value In 2022

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Lower bond yields spurred the ASX200 to a 5.8% gain in July as growth, technology and real estate outperformed.

-The ASX200 gained 5.8% (total return) during July
-Growth outperformed Value, Technology and Real Estate the best
-Growth now leads Value in 2022
-The Australia 10-year bond yield fell by -60bps to 3.06%
-Commodity prices continued downward trend from April
 

By Mark Woodruff

The ASX200 gained 5.8% (including dividends) in July, as global equities rallied on a positive US reporting season and growth concerns that led interest rate markets to pare back expectations for rate hikes.

The MSCI Developed Markets Index rose by 8%, with the S&P500 in the US gaining 9.3% in local currency terms, while US Cyclicals and the Nasdaq outperformed. Europe and Japan gained 6.1% and 4%, respectively, while stocks in China lost -16.4% on rising concerns relating to the property sector.

In Australia, all sectors besides Materials rose for the month with Information Technology and Real Estate the best performed, gaining 15.2% and 12.1%, respectively. Concerns about China’s growth contributed to a decline in commodity prices, which drove the underperformance of stocks in the Materials sector.

Growth outperformed Value in July by 6.1% as the Technology and Healthcare sectors surged, and, interestingly, Growth now has leadership in the calendar year after consecutive months of strong outperformance. Morgan Stanley points out the opposite is true globally, where Value has maintained Style leadership, most notably in the US. Returns for Value in Australia were dragged down by mining stocks, notes Macquarie.

Industrials outperformed Resources over July, particularly among large caps, while  the Small Ordinaries Accumulation Index gained 11.4% and outperformed large and mid-cap indices. It should be noted, the small-cap index is making up lost ground and remains the worst performing Size index in 2022.

In stark contrast to the ASX200, the Materials sector led the Small Ordinaries Index higher, followed by Real Estate and Financials.

According to Macquarie, small caps often lead out of bear markets, though caution is still required over slower growth from rising interest rates. The broker still sees an increasing likelihood of a US recession by early 2023.

At a stock level, banks drove the outperformance with CommBank ((CBA)), National Australia Bank ((NAB)) and Westpac Bank ((WBC) among the top four stocks contributing to the ASX200’s gain. Meanwhile, BHP Group ((BHP)) was the only outsized detractor in the month, with Rio Tinto ((RIO)) next in line.

An improvement in investor sentiment was also seen in bond markets as US 10-year Treasury yields dropped by -33bps to 2.64%, while in Australia the 10-year yield declined by -60bps to 3.06%. According to Ord Minnett, the futures market is now pricing in Reserve Bank of Australia cash rate cuts in 2023, suggesting recessionary risks have now increased.

Prices for iron ore, copper and wheat all declined during July while natural gas leapt more than 50%. Commodity prices have weakened since April due to concerns about global growth and China stimulus, notes Macquarie.

ASX100 Best and Worst Performers of the month

ASX200 Best and Worst Performers of the month

ASX300 Best and Worst Performers of the month

ALL-TECH Best and Worst Performers of the month

Banks

The 9.5% average total shareholder return of the major banks in July outperformed the ASX200 gain of 5.8%.

Aside from the 4.8% gain for ANZ Bank ((ANZ)), all the banks outperformed with Bendigo & Adelaide Bank ((BEN)) gaining 13.6%, Bank of Queensland ((BOQ)), 12.7%, National Australia Bank 11.7%, CommBank 11.5% and Westpac Bank 10.3%.

Relative to the other major banks, Morgan Stanley estimates CommBank is trading on a record price earnings (PE) premium of 54%. By contrast, ANZ Bank is trading on a discount of -27%.

The average PE multiple discount of the major banks relative to the All Industrials ex Banks is -25%, well below the peak of -43% at the end of January, and is at its lowest level since mid-2017, according to the broker.

The average major bank one-year forward dividend yield is 5.5%, note the analysts, which compares with a post-2010 average of 6.0%.

Financials ex-Banks

Returns for Australian Financials Ex-Banks in July were split across the outperformance by market-linked stocks and the underperformance of insurers, which suffered as rates fell and reinsurance costs rose, explains Morgan Stanley.

Outperformers among market-linked stocks included Link Administration ((LNK)) which gained 16%, Magellan Financial Group ((MFG)) 14%, AMP ((AMP)) 14% and Macquarie Group ((MQG)) which gained 10%.

For the Insurers, Insurance Australia Group gained 3%, Suncorp Group 2%, while QBE Insurance ((QBE)) lost -5%.

Emerging companies 

As mentioned previously, the Small Ordinaries Accumulation gained 11.4%, outperforming the ASX100 by 6.1%.

Small Industrials gained 11.8%, while Small Resources gained 10.8%, outperforming the ASX100 Resources by 11.8%.

The best performing sectors were Healthcare which gained 22.7%, Information Technology 17.7% and Financials which gained 14.5%. 

REITs

REITs provided a total return of 11.93% in July, outperforming the 5.8% gain for the ASX200.

Softening Australian and US policy rate expectations provided impetus, explains Ord Minnett. Catalysts included falling 10-year yields, along with a below-consensus second quarter Australian consumer price index reading of 6.1%, versus market expectations for 6.3%.

Credit Suisse provides a 12-month snapshot of returns. For the year-ended 31-July 2022, REITs delivered a total return of -2.06%, outperforming the broader ASX200 by 0.11%.

Returning to July, Fund managers Charter Hall ((CHC)), Home Consortium ((HMC)) and Goodman Group ((GMG)) were among the relative outperformers after being sold-off quite aggressively in recent months, notes Credit Suisse. Meanwhile, retail-exposed names took a breather after a period of relative outperformance.

Outperformers for July included HealthCo Healthcare and Wellness REIT ((HCW)) which gained 23.7%, Ingenia Communities ((INA)) 17.5%, Charter Hall 15.4%, Home Consortium 15.3% and National Storage REIT ((NSR)) which gained 13.8%.

Underperformers for the month included Stockland ((SGP)) which gained 4.6%, RAM Essential Services Property Fund ((REP)) 5.1%, Charter Hall Long Wale REIT ((CLW)) 5.1%, Mirvac Group ((MGR)) 5.4%, and GPT Group ((GPT)) 5.8%.

Interest rates

In the US, the 10-year treasury yield fell by -33bps to 2.64%, as second quarter GDP figures moderated inflationary fears.

Meanwhile, in Australia the 10-year bond yield fell by -60bpts to 3.06%, and the Reserve Bank raised the cash rate by 50bps to 1.35%.

Commodities

The CRB Commodity Index rose by 0.3% to 292 in July.

Brent crude oil fell by -4.2% to US$110/bbl as bans on Russian shipments were delayed, explains UBS.

The iron ore price fell by -4.1% to $US117/t, as Brazilian shipments hit record highs, notes the broker, and demand remains soft.

The gold price decreased by -2.3% to US$1,765/oz, as moderating inflation expectations improve investor risk sentiment, according to UBS.

Hard coking coal prices fell by -32%, while thermal coal rose by 5.7% during July.

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 1.2% to 105.90.

The Australian dollar closed out July at US69.85cents, rising by 1.2% from the end of June. 

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