January In Review: Strongest Start Since 1986

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The ASX200 gained 6.2% in January, buoyed by a decline in 10-year bond yields and strong performances by the discretionary, materials and finance sectors.

-The ASX200 gained 6.2% (total return) during January 
-Value and Growth were evenly matched, as were large and small caps 
-Discretionary, Materials and Finance sectors outperformed 
-Australian 10-year bond yield fell by -50bps to 3.55%
-The Australian dollar jumped by 3.6% to US$70.80
 

By Mark Woodruff

In the best start to a year since 1986, the ASX200 gained 6.2% (including dividends) in January, just shy of the 6.3% return for the S&P500.

The ASX200, in US dollar terms, outshone all other global indices for the month, which also rallied on easing rate hike fears, the re-opening of China and lower gas prices in Europe.

The ASX200 was assisted by a fall in the Australian 10-year yield of -50bps to 3.55%, while US 10-year yields also moved down by -35bps to 3.53% in reaction to stabilising GDP and inflation prints which supported positive sentiment.

Over the last year, the ASX has surpassed global markets with a rise of 15% in both local currency and US dollar terms (January 2022 was dreadful).

Such outstanding performance compares to an -8% fall for the S&P500 in the US. Macquarie attributes this outperformance to a higher weighting in late-cycle cyclicals such as Financials and Resources and a low weighting for Technology, which has been severely impacted by rising bond yields.

With the exception of Utilities, all sectors had a positive impact on performance within the ASX200 Index in January, with Discretionary, Materials and Finance the best performers. Materials were responsible for over a third of the ASX200's gain.

The Discretionary sector returned 10%, helped along by positive pre-announced results from cyclical retailers like JB Hi-Fi ((JBH)) and Super Retail ((SUL)), which rose by 15% and 18%, respectively.

Macquarie points out the Retail and Consumer Services sub-sectors account for the majority of Discretionary’s index weight, yet the best returns came from Consumer Durable thanks largely to a  23% rally for Breville Group ((BRG)). The Autos sub-sector also performed well after a 24% rally by ARB Corp ((ARB)).

Consistent with early cycle performance, according to the broker, Media also outperformed with a 12.2% return, while Utilities lost -3% on government intervention fears and falling power prices. It’s thought Utilities may have suffered regardless of these concerns, given it is a defensive sector in a climate where investors are seeking cyclical risk.

Large, mid and small caps all returned around 6%, while Resources outperformed Industrials.

Returns from Value and Growth were similar at 6.6% and 6.5%, respectively, while the top performing factors in January were High Dividend yields (10.2%) and Quality (8.1%).

Sector rotation in the US showed a pattern more common with a risk-on rally. Growth (10.3%) rebounded strongly compared to Value (3.25%) after underperforming badly in 2022, while small caps outperformed large caps.

Macquarie cautions over a potential false start. History suggests central bank easing or fiscal stimulus is required to support investor confidence and drive a sustained rotation towards cyclical risk.

Commodity price moves were mixed in January. Gold prices rose by 5% to US$1,928.40/oz as investors anticipate the end of central bank tightening is near as consumer price inflation starts trending down and also because of safe haven flows after renewed geopolitical tensions, according to UBS.

This broker forecasts a gold price of US$1,900/oz by December in the expectation the Federal Reserve cuts rates by -175bps.

Brent Oil prices fell by -US$1.01 to US$84.50/bbl on uncertainty around Chinese demand, while iron ore climbed just under 10% to $US129.50/t.

The Australian dollar moved higher by 3.6% to US$70.80.

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

Australian Banks

The average total shareholder return for the major banks of 5.2% in January trailed the 6.2% ASX200 gain.

CommBank ((CBA)) was the best performer with a 7.3% return while Westpac ((WBC)) was the worst (1.6%). ANZ Bank and National Australia had returns of 6% and 5.8%, respectively.

Based on consensus estimates, Morgan Stanley observes the average major bank one-year forward dividend yield is around 5.5%, which compares with a post-2010 average of circa 6.0%.

The broker feels the majors are expensive when compared to bonds, as the excess yield compared to the 10-year bond yield has fallen to circa 1.6%, which compares to an average since 2010 of around 3%.

Australian Financials Ex-Banks

Both Computershare ((CPU)) and Challenger ((CGF)) provided a drag on the performance of Financials Ex-Banks in January, with this segment underperforming the ASX200.

Valuation support for both companies is not as strong as it was due to lower expectations for the level of interest rates, observes Morgan Stanley.

A further drag on the sector arose from underperforming insurers Insurance Australia Group ((IAG)), Suncorp Group ((SUN)) and QBE Insurance ((QBE)) as stronger pricing trends were outweighed by flooding in New Zealand and rising re-insurance rates, notes the broker.

On the flipside, Platinum Asset Management ((PTM)), Macquarie Group ((MQG)) and GQG Partners ((GQG)) rose by 20%, 13% and 8%, respectively, carried by more bullish financial markets.

REITs

Assisted by falling bond yields, the total return of 8.12% for the REITs sector in January outperformed the ASX200.

Fund Managers like Goodman Group ((GMG)), Charter Hall ((CHC)) and Centuria Capital ((CNI)) bounced back from weakness in December, while small cap names were relative underperformers after a strong December, explains Credit Suisse.

Despite the potential impact from the upcoming February reporting season, the broker suggests macroeconomic factors will likely hold greater weight than individual results for REITs.

All stocks in the sector under coverage by Credit Suisse went ex-dividend in late December apart from HMC Capital ((HMC)), Lendlease ((LLC)), Scentre Group ((SCG)) and Vicinity Centres ((VCX)).

The analysts remain attracted to Charter Hall and Goodman Group despite the risk that multiples will de-rate should bond yields spike again. 

While pure-play Retail names are considered fully valued and there is a risk of moderating discretionary retail sales, Charter Hall Retail REIT ((CQR)) and Region Group ((RGN)) are preferred, given heavy weightings to supermarket/non-discretionary tenants.

Mirvac Group ((MGR)) is Credit Suisse’s preferred exposure to the Office sector (which has its challenges), while Growthpoint Properties Australia ((GOZ)) has an element of undervaluation relating to its Office exposure, but also allows investors to gain exposure to strong fundamentals in the Industrial sector.

Commodities

The CRB Commodity Index rose by 0.1% to 278 in January.

Brent crude oil fell by -1.7% to US$84.50/bbl.

The iron ore price rose by 9.7% to $US129.50/t.

The gold price increased by 5.7% to US$1,928.40/oz.

The price of Hard coking coal rose by 17%, while thermal coal fell by -37.7% during January.

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 -1.4% to 102.1.

The Australian dollar moved higher by 3.6% to US$71.00.

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