October In Review: Banks Lead In Strong Rally

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The ASX200 gained 6.0% in October after a strong contribution from the banking sector buoyed by a decline in the 10-year bond yield.

-The ASX200 gained 6.0% (total return) during October
-Growth marginally outperformed Value; Financials and Energy were best
-Consumer Staples and Metals & Mining were the worst performers
-The Australian 10-year bond yield fell by -13bps to 3.76%
-Commodity prices continued the downward trend from April
 

By Mark Woodruff

The ASX200 gained 6.0% (including dividends) in October, which largely recovered the -6.2% lost in September, thanks largely to a buoyant Banking sector.

Banks were supported by a more-dovish-than-expected 25bps interest rate hike to 2.60% by the Reserve Bank of Australia. In early November the RBA again raised rates by 25bps to 2.85%.

Apart from the boost provided to Financials by the banks, the Energy, Real Estate and Discretionary sectors were also significant contributors to market performance in October.

Consumer Staples was the worst performer, largely due to a sell-off in Staples Retail, while Metals & Mining was the second worst sector.

Global share market sentiment lifted on speculation that central banks are nearing the peak of policy tightening, explains UBS. The S&P500 in the US rose by 8.1% in local currency terms and the MSCI Developed Markets Index rose by 7.5%.

In Australia, the 10-year yield moved down by -13bps to 3.76%, while US 10-year yields rose by 28bps to 4.07%, despite speculation of a potential pivot in the Federal Reserve’s policy path (since dashed).

While underperforming share market gains in the US over October, Australia continues to lead in terms of year-to-date performance.

Growth outperformed Value in Australia by 0.2% for the month though Value has outperformed Growth globally in the year-to-date.

Value outperformed by 6.6 percentage points in the US and, given the ongoing risk of a US recession in 2023, there was also a bias to Defensives over Cyclicals, explains Macquarie.

The broker believes a further rise in corporate credit spreads in Australia is reflective of this increasing risk of a US recession. Corporate spreads are now higher than the peak during the initial covid shutdowns in 2020.

Mid-caps outperformed large and small cap counterparts over the month in Australia, while Industrials outperformed Resources across all size indices, performing best in mid-caps.

Morgan Stanley detects from consensus earnings expectations a significant shift in earnings mix towards Industrials and away from Resources.

More broadly, based on all the central bank rate hikes in 2022, Macquarie continues to think we are at the start of a long downgrade cycle that may last through 2023.

Oil prices rose, while iron ore and gold prices declined in a mixed performance for the commodities complex in October.

On a wider perspective, commodity prices have weakened since April, points out Macquarie, due to concerns about global growth and China lockdowns.

While the US Dollar continues to strengthen, as investors see a relatively hawkish US central bank and rising global uncertainty, the Australian dollar remained relatively flat over October.

The importance of the future direction of the Australian dollar on the ASX has been highlighted by recent Ord Minnett research. It’s estimated 12% of revenues emanate from the US, with the figure climbing to 45% when US dollar-denominated sales are included, as for mining and energy stocks.

All else being equal, should the Australian dollar fall a further -US5c, the broker sees considerable earnings upside potential for the likes of Alumina Ltd ((AWC)), Aristocrat Leisure ((ALL), Incitec Pivot ((IPL)) and Origin Energy ((ORG)).

On the other hand, should the currency appreciate by US5c, Qantas Airways would be a key beneficiary, according to Ord Minnett.

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 average total shareholder return of 14.2% for the major banks in October materially outperformed the 6.0% gain for the ASX200.

All the banks outperformed, with a 16.8% return for Westpac ((WBC)) leading the way for the majors. The regionals also performed well with Bank of Queensland ((BOQ)) and Bendigo & Adelaide Bank ((BEN) gaining 16.8% and 15.7%, respectively.

Among the other major banks, CommBank ((CBA)), National Australia Bank ((NAB)) and ANZ Bank ((ANZ)) each gained 15.4%, 12.5% and 12.1%, respectively, as the average price earnings multiple increased over October after de-rating in the previous two months.

Since the start of the current RBA tightening cycle, the broker points out the major banks' share prices have fallen by an average of -1%.

Based on consensus estimates, Morgan Stanley notes the average major bank one-year forward dividend yield is around 5.3%, which compares with a post-2010 average of circa 6.0%. It’s felt banks are no longer cheap when comparing this yield to that for ASX Industrials ex-banks.

Ord Minnett notes the major banks raised advertised rates on full-feature home loans by 25bp in October, whereas a few smaller banks chose to hold back a portion of the rate increase on new lending.

This broker estimates CBA offers the best interest rate leverage from among the majors, followed by NAB and Westpac, while ANZ has the least leverage owing to its Institutional tilt.

Australian Financials Ex-Banks

Morgan Stanley observes Australian Financials Ex-Banks mostly outperformed the ASX200 in October.

Several companies outperformed on more stable earnings and/or flows.

Challenger ((CGF)) and Macquarie Group ((MQG)) gained 20% and 11%, respectively, while Pendal Group ((PDL)), Insignia Financial ((IFL)) and Janus Henderson ((JHG)) just fell short of 10% gains.

Suncorp Group ((SUN)) and Insurance Australia Group ((IAG)) gained 14% and 7%, respectively, after a Federal Court of Australia judgement into covid-related business interruption claims.

Shares of the ASX ((ASX)) fell by -6% on lower volumes for interest rate products, according to Morgan Stanley, and ongoing concerns surrounding the CHESS replacement project.

REITs

Credit Suisse detected a potential mindset change by investors toward the REIT sector, which achieved a gain of 9.91% for October, compared to a global return of -1.8%.

While lower bond yields boosted the performance, the broker saw a lot more investor interest in the second half of October, based on emerging value for the sector.

However, many investors await some price discovery from direct markets and continue to discount most REITs, apart the fund managers.

For the 12 months ending October 31, REITs have delivered a total loss of -14.06%, under-performing the broader ASX200 by -12.05%. The around -14% loss in Australia compares favourable with losses of -25.7% globally.

JP Morgan highlights specialist REITs were outperformers for the month and included Arena REIT ((ARF)) which gained 18%, National Storage REIT ((NSR))17%, Centuria Industrial REIT ((CIP)) 17%, Shopping Centres Australasia Property ((SCP)) 15.7% and Waypoint REIT ((WPR)), which gained 15.2%.

On the flipside, Lendlease Group ((LLC)) lost -2.6%, GDI Property ((GDI)) -1.9%, while small gains were registered for HealthCo Healthcare & Wellness REIT ((HCW)) 1.4%, RAM Essential Services Property Fund ((RAM)) and Centuria Office REIT ((COF)) gained 3.4%.

In general, office-exposed REITs underperformed, notes JP Morgan including Dexus ((DXS)), Cromwell Property Group ((CMW)) and Mirvac ((MGR)).

For the shorter-term, Credit Suisse suggests pure-play Retail names should continue to hold up relatively well. In addition, the fund managers Charter Hall Group ((CHC)) and Goodman Group ((GMG)) are considered attractive with capital flexibility and strong balance sheets.

The broker recommends Outperform-rated Mirvac Group and Stockland ((SGP)) on a longer-term view for those investors willing to look beyond the current Residential cycle.

On the residential front, Morgan Stanley noted national house prices fell by -1.1% in October, the sixth consecutive month of decline but a moderation in pace from the prior month. Nationally, prices are now down -6.5% from April 2022 peak levels.

Commodities

The CRB Commodity Index rose by 2.2% to 274 in October.

Brent crude oil rose by 7.8% to US$94.8/bbl, amid European Union trade embargos lowering supply and production, explains UBS.

The iron ore price fell by -19% to $US81/t on seasonally lower steel demand, notes the broker, and higher supply levels.

The gold price decreased by -1.6% to US$1,633.60/oz on US dollar strength and as higher real rates continue to weigh, according to UBS.

Hard coking coal prices rose by 18.3%, while thermal coal fell by -17.8% during October.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, declined by -0.5% to 111.53.

The Australian dollar remained relatively flat from the end of September and closed at US$63.97.

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