September In Review: All ASX Sectors Lose Ground

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All sectors of the Australian stock market lost ground in September as global recession fears and higher bond yields weighed, resulting in a -6.2% loss for the ASX200.

-The ASX200 lost -6.2% (total return) during September
-Value outperformed Growth, Materials and Energy were best
-Financials and Real Estate were the worst performers
-The Australian 10-year bond yield rose by 29bps to 3.89%
-Commodity prices continued the downward trend from April
 

By Mark Woodruff

The ASX200 lost -6.2% (including dividends) in September as investors priced in the most aggressive Reserve Bank of Australia rate-hiking cycle since the 1990’s.

All sectors fell in the month for the first time since March 2020, with Financials and Real Estate the worst performing, as global recession fears and an increasingly hawkish Federal Reserve in the US weighed on sentiment. The Materials and Energy sectors fell the least.

The Australian market outperformed the MSCI Developed Markets Index and the S&P500 in the US, which in local currency terms lost -8.3%, and -9.2%, respectively.

Regarding style, Value lost -4% in the Australian market though outperformed Growth and Quality, which lost -7.3% and -5.4%, respectively, consistent with the rapid rise in real yields.

Large caps lost -5.4% in September yet materially outperformed small caps (-11.2%), highlights Macquarie, as gains from the recent bear market rally were unwound.

Moreover, small caps have greater exposure to Real Estate and Discretionary relative to the large cap exposure to Financials, explains Morgan Stanley.

While these size trends were more moderate in the US, defensives outperformed cyclicals, which is indicative of a market factoring in a US recession, according to Morgan Stanley. A rise in US corporate credit spreads in the final days of the month was also considered a signal of oncoming recession.

Back in Australia, Resources outperformed Industrials across the larger size indices, though Small Resources (-13.5%) underperformed Small Industrials, which lost -10.5%.

Among industry groups, Metals & Mining was best performing in losing -1.9%, ahead of Pharma (-2.8%) and Telecom (-3.4%). On the flipside, Utilities, Real Estate and Transport lost -13.8%, -13.6% and -11.00%, respectively.

The Australian ten-year yield increased by 29bps to 3.89% following the RBA's 50bps hike to 2.35%. In early October, the RBA again raised rates, though just by 25bps to 2.60%.

UBS expects peaking global (and domestic) inflation, to 'stop-out' the RBA at 3.1% by December this year. It’s felt interest rate cuts will then commence in the second half of 2023.

Meanwhile, the US ten-year yield rose 67bps to 3.80%, as the August Manufacturing PMI beat the consensus estimate, explains UBS, strengthening the expected policy response from the Federal Reserve.

Macquarie feels we are at the start of a long downgrade cycle for earnings forecasts in the US that may not see aggregate earnings bottom-out until late in 2023.

Also, Morgan Stanley expects the upcoming AGM season for ASX-listed companies will demonstrate lower growth and tighter conditions.

Commodity prices fell during the month, with Brent Oil prices down and gold prices continuing to trend lower, amid higher real rates and US dollar strength, which resulted in a lower Australian dollar.

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

Australian Banks

The -4.3% average total shareholder return of the major banks in September outperformed the -6.2% loss for the ASX200.

ANZ Bank ((ANZ)) and Westpac bank ((WBC)) relatively outperformed by losing -0.1% and -4.5%, respectively, while Comm Bank ((CBA)) was the worst performed of the major banks and lost -6.9%. National Australia Bank ((NAB)) also lost -5.8% for the month.

Based on consensus estimates, Morgan Stanley notes the average major bank one-year forward dividend yield is around 5.8%, which compares with a post-2010 average of circa 6.0%.

Regional Banks performed the worst in September, with Bank of Queensland ((BOQ)) and Bendigo & Adelaide Bank ((BEN)) losing -7.4% and -11.2%, respectively.

Australia Financials Ex-Banks

A softer economic outlook and lower public asset valuations, explains Morgan Stanley, meant returns for Australian Financials ex-banks mostly underperformed the ASX200 in September.

Positive leverage to interest rates helped Computershare ((CPU)) shares remain unchanged, while Insurance Australia Group ((IAG)) and QBE Insurance ((QBE)) also relatively outperformed by losing -1% and -4%, respectively.

Suncorp Group ((SUN)) fell by -8% as it is relatively most exposed to La Nina, explains Morgan Stanley. The Australian Bureau of Meteorology recently declared another La Nina is underway.

Link Administration ((LNK)) suffered a heavy sell off (-33%) with the Dye and Durham takeover deal off the table (new proposal for a part of the company in October) and the company facing the prospect of a large fine by the UK Financial Conduct Authority.

REITs

In the worst monthly performance since covid spooked global markets, REITs lost -13.6% in September and all 24 constituents of the ASX200 REIT index were down at least -7.0%.

While the sell-off can largely be attributed to rising bond yields, Credit Suisse feels offshore investors were net sellers (of some names with larger market capitalisations) to avoid currency risk.

Investors remain wary, according to the broker, despite the sector looking more attractive. It’s felt the focus will be upon direct market transaction evidence, and whether rental growth can (partially) offset rising capitalisation rates.

In theory, there could be potential for M&A activity as a way to increase returns though it may be challenging for REITs to access cheap debt to facilitate a takeover, explains Credit Suisse.

The largest underperformers in September included the property fund managers. Goodman Group ((GMG)) and Centuria Capital Group ((CNI)) lost -19.8% and -16.3%, respectively.

REITs exposed to childcare also fell with Arena REIT ((ARF)) losing -19.7% and Charter Hall Social Infrastructure REIT ((CQE)) losing -16.2%.

JP Morgan notes that Goodman, Centuria Capital and Arena REIT are all names associated with growth and more impacted by rising bond yields.

Relative outperformers included some retail and storage names. BWP Trust ((BWP)) and Waypoint REIT ((WPR)) lost -7.0% and -8.4%, respectively, while National Storage REIT ((NSR)) and Abacus Property Group ((ABP)) lost -8.2% and -8.5%, respectively.

Property developer Mirvac Group ((MGR)) was also among the relative outperformers and Credit Suisse sees value for both Mirvac and Stockland ((SGP)) for longer-term investors who are willing to hold during the current residential cycle. It’s felt Office-exposed names will continue to be viewed with caution.

Commodities

The CRB Commodity Index fell by -7.6% to 268 in September.

Brent crude oil fell by -18.8% to US$88/bbl.

The iron ore price rose by 2% to $US100/t.

The gold price decreased by -2.9% to US$1,660.60/oz.

Hard coking coal prices fell by -4.2%%, while thermal coal rose by 2% during September.

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 3.1% to 112.12.

The Australian dollar closed out September at US64.07cents, falling by -6.5% from the end of August. 
 

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