September In Review: All ASX Sectors Lose Ground

Australia | Oct 06 2022

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.

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