July In Review: Banks Beat Small Caps

Australia | 1:16 PM

The ASX200 outperformed overseas indices in July aided by ongoing strength in bank share prices.

-ASX200 gained 4.2% (total return) in July
-Small caps underperformed
-Growth outperformed Value, Resources lag
-Banks account for 40% of the ASX200 rise since October

By Mark Woodruff

July is the best month of the year for ASX returns, and true to form the ASX200 gained 4.2% (including dividends), setting a new high at 8092 and outperforming US equities.

In contrast to the US, where Growth shares (led by the Magnificent Seven) fell and funds were diverted to small caps, Growth outperformed in Australia in July and small caps lagged.

In a broad measure of global equity market performances, the MSCI All Country World Index (ACWI) rose by 1.2% in July. The S&P500 in the US gained 1.22%, while the Nasdaq100 lost -1.6%. In Australia, the All-Technology Index gained 1.3%.

All sectors in Australia reacted positively, following a less-than-expected second quarter CPI print, led by Financials, Consumer Discretionary and the Real Estate sectors, while Utilities, Energy and Materials fell behind.

Industrials were again preferred over Resources in July.

The ASX200 has now climbed by 22.5% from October 2023 lows, highlights Morgan Stanley, with Banks accounting for 40% of that rise.

In terms of index weight, the broker points out Banks now have a 1.1% percentage point lead over Resources, having closed the -7.6% percentage point gap in 2024.

There was broad based strength seen across all sizes of indices in July, though the Small Ordinaries and Emerging Companies (ex-ASX300) trailed large caps by -70bps and-400bps, respectively. Small Caps have greater exposure to Discretionary and Real Estate relative to large cap exposure to Financials, explains Morgan Stanley.

Macquarie attributes the 2.5 percentage point outperformance of Growth over Value in Australia largely to the -1% decline in Resources.

A 12.2% gain for Discretionary Retail was the best sector performance, suggesting to Macquarie investors are positioning for a cut in interest rates and a subsequent improvement in consumer spending. Utilities suffered the largest loss of -2.9%, partially attributed due to a fall in electricity futures.

The CRB Index fell by -4.3% over July, pulled down by falls for iron ore and Brent crude oil of -4.2% and -6.6%, respectively.

The gold price jumped by 5.2% to US2,447.60/oz and the Gold sector rallied 8.4% largely supported by a fall in bond yields in response to an increased probability of rate cuts, explains Macquarie. The sector gain was driven by a 16% gain for Newmont Corp ((NEM)), but there were also strong gains in small cap gold stocks such as Resolute Mining ((RSG)) and Genesis Minerals ((GMD)), which gained 25% and 19%, respectively.

The US dollar Index (DXY) a measure of the value of the US dollar relative to a basket of foreign currencies, fell by -1.7% to 104.10, and the Australian dollar also moved lower by -1.9% to US$0.6550.

Because of weaker shares for the Magnificent Seven, Macquarie's proprietary FOMO meter (which measures equity sentiment) fell to 1.17 by the end of July, having reached 1.48 mid-month.

Still, a FOMO meter reading above 1.0 indicates bullish sentiment based on the market expectation for interest rate cuts in the US, and the hope this will prevent a large rise in unemployment, explains the broker.

ASX cash futures had assigned a 5% likelihood of an interest rate easing by the Reserve Bank in early-August, notes Macquarie, and a slightly better than 1-in-10 chance for a -50bps move in September by the Federal Reserve in the US.

Domestically, Morgan Stanley believes the path for earnings remains challenged and the upcoming corporate reporting season presents ongoing risk.

This broker believes interest rates are now on hold in Australia with the first cut likely in May 2025.

Macquarie cautions August is generally a mixed month and September is typically negative, and the worst month of the year for investment returns from the local share market.

For more on Australian banks, see further below.