March In Review: Equities Recover To End Flat

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The ASX200 lost -0.2% in March, bouncing back from intra-month lows after the index had declined for seven consecutive weeks.

-The ASX200 lost -0.2% (total return) during March 
-Materials gained, while financials and real estate lagged
-Value surpassed growth and large caps continue to outperform
-Australian 10-year bond yield fell by -56bps to 3.30%
-Gold price rose by nearly 8% to US$1,969.3/oz
 

By Mark Woodruff

The ASX200 lost -0.2% (including dividends) in March, rallying back from an intra-month low. The index had suffered seven consecutive weeks of declines and at that nadir, the longest streak of losses since the 2008 global financial crisis.

A softer reading on inflation than anticipated had Morgan Stanley forecasting Australian interest rates would be kept on hold at 3.60% in April (as occurred yesterday), after the RBA pushed through the tenth consecutive rate hike early in March (25bps).

Markets are now focusing on harder-landing scenarios, according to the broker, given recent global banking concerns. Despite the pause by the RBA this week, it’s thought the path to significant easing of interest rates won't be easy.

The Australian 10-year bond yield fell by -56bps to 3.30% over March, while 10-year yields in the US declined by -49bps to 3.49%.

The ASX200 underperformed both the MSCI Developed Markets Index and the S&P500 in the US which gained 2.6% and 3.7%, respectively, in local currency terms.

On a sector basis, Materials was the best performed in March with a gain of 5.9% (the Gold sub-sector rising by 18.9%), while Communication Services and Consumer Discretionary also gained 3.4% and 1.7% respectively.

REITs was the worst sector losing -6.4%, with Financials and Energy losing -4.9% and -1.5%, respectively. Banks' underperformance against the ASX200 for the third consecutive month weighed on Financials.

Value outperformed Growth by 1.5 percentage points largely due to the strong performance by Resources, notes Macquarie.

Larger cap miners BHP Group ((BHP)) and Rio Tinto ((RIO)) added the most value, along with Newcrest Mining ((NCM)), which received a take-over approach.

Large, small and mid-cap indices performed in similar fashion; Resources were preferred over Industrials across all indices.

For the first quarter of 2023, large caps have gained 3.5%, compared to a flat performance for the MidCap50 and a -1.9% decline for the Small Ordinaries.

The leading index overall was Small Cap Resources which gained 5.6%, also helped by a bid for Liontown Resources ((LTR)) by US-based Albemarle.

Takeovers were in vogue with cash offers for Liontown, InvoCare ((IVC)) and United Malt ((UMG)), while Healius ((HLS)) received a script-based offer. In February, Newcrest Mining also received a script offer from US-based Newmont Corp.

Commodity prices displayed mixed trends over March with iron ore barely changed and Brent Oil falling by -4.9%. The gold price jumped by 7.8% due to banking volatility and hopes for policy easing by the Federal Reserve in the US, explains UBS.

Macquarie still believes past interest rate hikes from global central banks will provide an earnings headwind for equities over 2023.

UBS agrees and sees risks building towards an acceleration of company guidance downgrades in Australia as the consumer comes under pressure from not only past rate hikes, but also as fixed rate mortgages roll off.

The case for equities has softened, according to this broker, and its year-end forecast for the ASX200 is now 7,250, down from 7,500.

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 major bank total shareholder return (TSR) was -5.2% for March.

Morgan Stanley believes tailwinds which drove an EPS upgrade cycle for banks during 2022 have come to an end, and suggests the majors will underperform the ASX200 in 2023, having already done so for the third consecutive month.

CommBank ((CBA)) was the best performing major in losing -2.4% while ANZ Bank was the worst with a loss of -7.0%. National Australia ((NAB)) and Westpac ((WBC)) returned -7.6% and -3.9%, respectively.

Smaller banks also underperformed with losses by Judo Capital ((JDO)), Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) accumulating to -14.3%, -8.6% and -8.1%, respectively.

Based on consensus estimates, the average price earnings multiple discount of the major banks relative to the All Industrials ex Banks is currently -39%, down from -32% at the end of January, observes Morgan Stanley.

This discount is a little more than the three-year average of -37%, explains the broker, but a far wider discount than the post-2010 average of -27%.

Australian Financials Ex-Banks

Financials Ex-Banks mostly underperformed the ASX200 during March.

Market-exposed stocks suffered due to heightened volatility, observes Morgan Stanley. These stocks included Challenger ((CGF)) and Insignia Financial ((IFL)) which each lost -16%, and Perpetual ((PPT)) and Platinum Asset Management ((PTM)) which lost -9% and -5%, respectively.

Computershare also lost -13% on moderating interest rate expectations, while Lattitude Group ((LFS)) managed to gain 6% on a lower funding cost outlook, despite its cyber-attack woes.

REITs

REITs returned -6.79% in March in a material underperformance compared to the -0.2% loss for the ASX200, as the sector ignored a large fall in the Australian 10-year bond yield.

According to Credit Suisse, the sector was impacted by a greater focus on valuations, balance sheets, rising interest costs and debt covenant compliance.

Investors are rightly looking at potential breaches of interest cover ratios (ICRs), and the broker would not be surprised if many REITs are pro-actively looking at obtaining ICR covenant waivers, which would necessitate showing lenders how interest coverage may be improved.

While the analyst sees limited near-term scope for loan to value ratio (LVR) covenant breaches, and REITs within the broker’s coverage were well within their ICR covenants as at December 31, 2022, debt costs will continue to increase across the sector in the second half of FY23 and FY24.

March saw were three equity raisings for growth purposes (not for reducing debt) by National Storage ((NSR)), HMC Capital ((HMC)) and HealthCo Healthcare & Wellness REIT ((HCW)).

Commodities

The CRB Commodity Index fell by -0.8% to 268 in March.

Brent crude oil dropped by -4.9% to US$79.80/bbl.

The iron ore price rose by 0.8% to $US127.50/t.

The gold price increased by 7.8% to US$1,969.3/oz.

The price of hard coking coal was flat while thermal coal fell by -8.1%.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, decreased by -2.3% to 102.51.

The Australian dollar moved lower by -0.7% to US$66.90.

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