February In Review: Mining, Rates And Results Season Weigh

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The ASX200 lost -2.45% in February, dragged down by higher interest rates, a lacklustre February reporting season and a weak performance from mining.

-The ASX200 lost -2.45% (total return) during February 
-A strong US dollar contributed to a -7.5% fall for the mining sector
-Financials also fell, while utilities and insurance outperformed 
-The Australian 10-year bond yield rose by 30bps to 3.86%
-The Australian dollar fell by -4.6% to US$67.30
 

By Mark Woodruff

The ASX200 lost -2.45% (including dividends) in February, in line with the -2.4% negative return for the S&P500 in the US. Only the Asia Pacific-ex Japan index performed worse than Australia.

Australian 10-year bond yields rose by 30bps to 3.86% in reaction to tightening monetary policy, with the central bank maintaining its hawkish tone and raising the cash rate by 25bps to 3.35%.

Cash futures imply an 81% chance the cash rate rises another 25bps to 3.6% at the next Reserve Bank meeting.

The February reporting season also revealed waning earnings momentum and an operating environment that has likely peaked, according to UBS.

Morgan Stanley notes earnings growth estimates for FY23 have been driven down by lower forecasts across Industrials and Energy.

US 10-year yields also increased by 39bps to 3.92% in reaction to strong economic data and ongoing Federal Reserve rate hikes.

The Fed has hiked 450bps in the past year compared to a 325bps rise in the RBA cash rate over the same period.

A stronger US dollar contributed to a -7.5% return for Mining, the worst-performed sector in February. Gold stocks were among the largest decliners due to twin headwinds of rising real yields and a stronger US dollar, explains Macquarie. Lithium miners also suffered from a fall in the China lithium price.

There were positive contributions from Utilities, Technology, Industrials, Staples and Communication Services.

Growth outperformed Value by 2.6 percentage points in February, helped by the outperformance of Technology, where higher earnings more than offset the price earnings headwind from higher real yields, explains Macquarie.

Resources also contributed to the underperformance by Value, notes the broker, while Cyclicals and small caps lagged in a falling market.

Mid and small caps underperformed blue-chip peers with the MidCap 50 and the Small Ordinaries losing -3.2% and -3.7%, respectively.

BHP Group ((BHP)) was the largest single stock detractor of performance for the ASX200, followed by the Banks – CommBank ((CBA)), National Australia ((NAB)) and Westpac ((WBC)) – while QBE Insurance ((QBE)) added the most at a stock level.

Insurance was the best performed industry group with a gain of 6.5% as higher bond yields increase investment income and often lead to higher multiples for insurance stocks, points out Macquarie.

A 13.6% gain for Medibank Private ((MPL)) shares also boosted the sector after management guided to policyholder growth, despite the company’s recent cyber security troubles.

Commodity prices came under pressure from a higher US dollar and fell across the board in February, as shown by a -3% decline in the CRB Commodity Index. 

The Australian dollar was pressured by falling commodity prices and a narrowing of the yield spread, points out Macquarie, and fell by -4.6% to US$67.30.

Over 2023, this broker anticipates ongoing equity and bond market shifts in reaction to key data points. Investors should brace for swings from recession fears (as per November 2022) to soft landing hopes (January 2023) and back to negativity induced by hawkish central banks, as played out in February.

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 of -4.7% in February underperformed the -2.4% loss for the ASX200.

The individual performance of the majors from best to worst was as follows: ANZ Bank ((ANZ)) -1.8%, Westpac -5.0%, National Australia -5.6% and CommBank -6.6%.

For the regional banks, Bank of Queensland ((BOQ)) and Bendigo & Adelaide Bank ((BEN)) rose by 1.3% and fell by -2.8%, respectively.

Judo Capital ((JDO)) rose by a stellar 7.1% after first half results outpaced consensus forecasts.

Since the start of the current Reserve Bank tightening cycle, Morgan Stanley points out price earnings multiples for the major banks have de-rated by an average of around 3 times. In February the average slipped back to 12.7 times, reversing the January re-rating.

Based on consensus estimates, the average major bank one-year forward dividend yield is circa 5.8%. By comparison, the post-2010 average is around 6.0%.

Morgan Stanley considers the major bank yields are expensive when compared to bonds as the excess yield versus the 10-year Australian bond has fallen to 1.9% compared to the 3% average since 2010.

Australian Financials Ex-Banks

Stocks within the Financials Ex-Banks sector largely outperformed the ASX200 in February.

Within the Insurance space, QBE Insurance ((QBE)) and Suncorp Group ((SUN)) gained 10% and 5%, respectively, on stronger underlying trends, according to Morgan Stanley. However, margins and growth for Insurance Australia Group ((IAG)) underwhelmed expectations.

Higher interest rates, observes the broker, helped Computershare ((CPU)) and Challenger ((CGF)) outperform with gains of 5% and 4%, respectively.

Softer-than-expected results for Australian asset managers, according to Morgan Stanley, resulted in underperformance against the ASX200.

REITs

REITs returned -0.3% in February, outperforming the ASX200 by 2.1%.

Following the February reporting season, negative earnings revisions for FY23 by UBS reflected the ongoing impact of higher interest rates, overhead cost pressures and more challenging operating conditions, especially for residential development.

Early signs of asset devaluations were becoming evident in February reporting, observes the broker, and more devaluations are anticipated in the June 2023 reporting cycle.

By subsector, the analysts note leasing was better-than-feared for Office, while headwinds are building for currently-strong Retail, and there are limited inflows/activity for Fund Managers.

As part of a review of REITs in January, Credit Suisse felt the sector was more influenced by the macroeconomic backdrop than individual REIT metrics. Following the February reporting season this view remains unchanged.

The reporting season provided few surprises, and the broker makes some general observations including asset values held firm (as at December 31) despite rising bond yields, and most stocks in the sector continue to trade at a discount to net tangible asset valuation (NTA), as the market is pricing-in asset value declines.

REITs under coverage by Credit Suisse remain within their respective debt covenants. After a -1.02% rise in debt costs across the sector in the second half of 2022, the broker expects a continuation of this trend over FY23 and FY24 as hedges are reset.

The broker points out the total shareholder return for the sector is 11.8%, which includes a 4.5% DPS yield based upon a 67.1% payout ratio.

In the large-cap space, Credit Suisse likes the fund managers Goodman Group ((GMG)) and Charter Hall ((CHC)), as well as the non-discretionary retail-exposed Charter Hall Retail REIT ((CQR)) and Region Group ((RGN)). Within the Diversified sub-category Stockland ((SGP)) is preferred.

Outperformers for February were National Storage REIT ((NSR)) which gained 9.1%, GPT Group ((GPT)) 3.5% and Arena REIT ((ARF) which gained 3.5%.

Underperformers were Ingenia Communities ((INA)) which lost -13.2%, Cromwell Property ((CMW)) -8.3% and Charter Hall Social Infrastructure REIT ((CQE)) which lost -8.1%.

Commodities

The CRB Commodity Index fell by -3% to 270 in February.

Brent crude oil dropped by -0.7% to US$83.90/bbl.

The iron ore price fell by -2.3% to $US126.50/t.

The gold price decreased by -5.3% to US$1,826.90/oz.

The price of hard coking coal rose by 11.8%, while thermal coal fell by -23.4% during February.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, increased by 2.7% to 104.87.

The Australian dollar moved lower by -4.6% to US$67.30.

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