April In Review: The Bond Market Roared

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Rising bond yields meant interest rate-sensitive equities were out of favour in April, while investors sought inflation-protection in mining stocks and commodities.

-ASX outperforms US, but underperforms versus Europe and Emerging Markets
-Stubborn inflation is changing the market narrative, impacting on forecasts for rate cuts
-Investor sentiment no longer exuberant, but remains positive
-EPS growth forecasts beyond FY24 are highest for small caps

By Rudi Filapek-Vandyck

April marked the end of a global share markets rally that lasted five consecutive months. By the close of trading on April 30th, the ASX200 had lost -2.95%. Thanks to dividends, the local market's performance year-to-date remains a net positive 2.1% (up 0.97% ex divvies).

The local market outperformed the US, but underperformed relative to most European and Emerging Markets. Chinese equities rallied (up 6.5%) having virtually gone nowhere over the past ten years. 

The cause of the retreat lays with a change in the narrative that had accommodated the strong upswing in the months preceding; instead of being buoyed by the prospect of central bank rate cuts in 2024, the cold hard reality hit home that while economic growth remains stronger than forecast, so too remains to date the outcome for consumer price inflation.

Stubborn inflation, carried by housing rents and insurance, means central banks can not loosen policy (or at least not imminently). That realisation meant bond yields needed to rise (yet again), with negative consequences for equity markets and investor sentiment generally.

In Australia, some economists are now calling for additional RBA rate hikes.

Macquarie's proprietary FOMO Meter, designed to measure investor sentiment/exuberance, fell to 0.68 from a euphoric all-time record high 1.59.

Whenever this measure rises above 1, reports the broker, returns for the local market shrink to 'low' or 'negative'. The April reading indicates underlying sentiment remains relatively positive.

The general repricing in asset markets triggered a good old rotation in equities' short-term momentum with large cap resources narrowing the (valuation) gap with the major banks. Among banks, CommBank ((CBA)) and Macquarie Group ((MQG)) suffered most. Energy stocks would have liked to join-in, but the oil price refused to play ball.

Banks, in general, are still significantly outperforming resources since equities started rallying in October last year. Ahead of sector results in May, a public debate has started about valuations and future prospects for the sector in Australia.

Most commodities, with exception of some in the agri-segment, enjoyed investor support in April. For the second month in a row, gold miners outperformed the gains in gold bullion. This time, Newmont Corp ((NEM)) joined in on a stronger-than-expected quarterly performance.

An interesting observation to add, maybe, is the increased index weighting for BHP Group ((BHP)) in combination with a general resurgence in resources' share prices post-covid, has now made resources the largest index constituent locally, with banks second.

As should be expected during times when the almighty bond market roars, interest-sensitive sectors fared the worst in April, led by real estate and discretionary sectors (as more and more questions are being asked about the thus-far relatively resilient consumers).

Higher yields weigh proportionally more on higher PE stocks so 'Growth' and 'Quality' were no longer flavour of the month.

Healthcare did have a relatively good month, led by a resurgent ResMed ((RMD)). That stock had been out of favour for months because of uncertainty and panic about what GLP-1s might do to the company's growth outlook.

Nine of eleven sectors suffered a net retreat in April, with only two booking gains for the month; Materials (i.e. mining companies) and Utilities (thanks to Origin Energy ((ORG))).

The US ten year Treasury yield rose by 48bps to 4.7% (up 46bps in Australia), but has since given back about half of those gains. Yields were rising in the first quarter of the year, but equity markets chose not to pay attention, until they were forced to in April.

Higher-for-longer inflation meant institutional investors sought protection in commodities and resources stocks, which in Australia meant smaller-cap indices such as the Small Resources and the MidCap 50 Resources significantly outperformed larger cap peers.

April may have broken the five-month long positive stretch for the ASX200, but the index is still up more than 15% from late last year's bottom.

Valuations look anything but 'cheap' with the local market's average forward-looking PE ratio ending the month above 16x, whereas that average itself has crept up to 15.8x since 2014.

ASX200 Industrials ex-Financials are on average trading on 22.2x times forward-looking PEs – still high on historical comparison, but well below the multiples witnessed between 2020-2022.

The underlying trend for earnings forecasts remains negative, albeit in mild fashion only. With most quarterly production reports revealing weakness, forecasts for mining companies are falling most. Utilities and most sectors generally are enjoying a slight positive trend, with Staples, Communication, and Healthcare lagging.

Market consensus is now positioned for -6.8% in average EPS decline for FY24, to be followed by gains of 5.0% (FY25) and 4.1% (FY26), respectively.

Growth forecasts beyond FY24 are highest for small caps, with midcaps expected to outgrow large gaps. Analysts at Morgan Stanley see potential for earnings forecasts for resources companies to improve as well.

On Macquarie's forecasts, Small Resources are poised to grow at 82% in FY25, with Small Industrials expected to grow by 13% 'only' next year.

Companies enjoying positive revisions to earnings forecasts include ResMed, Block ((SQ2)), Netwealth Group ((NWL)), Bank of Queensland ((BOQ)), Challenger ((CFG)), and Ramelius Resources ((RMS)).

Companies with negative earnings forecast revisions include BHP Group, Champion Iron ((CIA)), Orora ((ORA)), Elders ((ELD)), Beach Energy ((BPT)), Mineral Resources ((MIN)), and Fortescue ((FMG)).

Among the month's top performers one finds the likes of Whitehaven Coal ((WHC)), South32 ((S32)), and Rio Tinto ((RIO)), but equally so non-resources companies like Computershare ((CPU)), Lovisa Holdings ((LOV)), GrainCorp ((GNC)), and Life360 ((360)).

On the opposite side, in a flash of unexpected irony, one finds Woodside Energy ((WDS)) and BHP Group ((BHP)) among the bottom-performers, together with Transurban ((TCL)), Wesfarmers ((WES)), Woolworths Group ((WOW)), CSL ((CSL)), and Goodman Group ((GMG)).

BHP signalled its positive view on the longer-term outlook for copper through an unsolicited bid for Anglo American. Glencore is rumoured to be weighing up whether to offer Anglo-American shareholders an alternative.

Among smaller sized companies, large gains were booked by the likes of Mesoblast ((MSB)), Emerald Resources ((EMR)), Alpha HPA ((A4N)), Boss Energy ((BOE)) and Telix Pharmaceuticals ((TLX)), with shareholders suffering big through sizable share price falls for Kogan.com ((KGN)), Beach Energy, Westgold Resources ((WGX)), Lifestyle Communities ((LIC)), and The Star Entertainment Group ((SGR)).

Most of the heavy share price falls have followed disappointing market updates.

Perhaps as an indication of the macro forces at play during the month, the ASX200's three largest detractors were the index's three largest constituents, in exact order of importance; BHP worst, then CBA, then CSL.

AREITs

Unsurprisingly, given the moves in global bond markets, AREITs were among the notable underperformers in April. The S&P/ASX200 Property Accumulation index returned -7.8% for the month, also underperforming international peers (in USD terms), reports UBS.

Office REITs were hardest hit, followed by Diversifieds, then Retail. Largest losses were reserved for Charter Hall ((CHC)) (-12.8%), Mirvac Group ((MGR)) (-12.7%) and Charter Hall Long WALE ((CLW)) (-11.3%).

UBS identified as Outperformers Centuria Capital Group ((CNI)) (-0.6%), BWP Trust ((BWP)) (-1.1%) and HomeCo Daily Needs REIT ((HDN)) (-3.1%).

On the broker's modeling, the sector is currently trading 0.6% above fair value with a sector-average dividend yield of 3.8% on FY25 forecasts.

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 %)

All index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

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