August In Review: Flat, Special Divs Shine

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In a volatile month of trading, the ASX200 eked out a small gain in August led by a strong performance by technology shares during the reporting season and the ongoing bank share rally.

-ASX200 gained 0.5% (total return) in August
-Technology and Gold sectors rally, Energy slumps
-Growth outperforms Value, large caps preferred
-Lowest US dollar in 12 months lifts the Aussie currency

By Mark Woodruff

After falling by around -6% in the first week of August in reaction to Japanese currency turmoil, the ASX200 ultimately gained 0.5% (including dividends) helped along by a strong reporting season for the Technology sector and the ongoing outperformance by banks.

Helping push the ASX200 into a positive return, dividends beat expectations in the reporting season and there was an increasing payout of special dividends to return excess franking credits, explains Morgan Stanley.

Macquarie’s measure of equity sentiment rose to 1.20 by the end of the month after falling as low as 0.66 in the Yen carry-trade sell-off but rebounded quickly in anticipation of interest rate cuts by the US Federal Reserve in September.

Broadly in line with the -14bps decline in US 10-year yields to 3.92%, the Australian 10-year government bond yield fell by -15bps over the month to 3.97%.

Regarding offshore equities, the MSCI Developed Markets Index rose by 1.9%, and the S&P500 in the US gained 2.4% led by gains of nearly 6% for the Consumer Staples and Real Estate sectors, while the Information Technology sector gained 1.25%.

Japan was the worst performing market with a -3.4% fall for the TOPIX Net Total Return Index (dividends included), retracing some of July’s strength due to a general risk-off sentiment in global markets, explains Morgan Stanley. The Chinese equity market also underperformed with the MSCI China Net Total Return Index losing -2.4%.

Back in Australia, the Technology sector gained 7.2% thanks to a strong reporting season and assisted by an around 25% rally for the best performer in the ASX100, WiseTech Global ((WTC)).

WiseTech was the fourth largest contributor to the ASX200, highlights Morgan Stanley,  behind CommBank ((CBA)), Westpac ((WBC)), and ANZ Bank ((ANZ)).

On the flipside, trying to pull down the index in the opposite direction were BHP Group ((BHP)), QBE Insurance ((QBE)), Cochlear ((COH)) and Mineral Resources ((MIN)).

Also gaining 6.7%, the Gold sector benefited from a fall in bond yields and the prospect of larger rate cuts in the US, explains Macquarie. The gold price breached US$2,500/oz for the first time in history.

Within the ASX100, Northern Star Resources ((NST)) and Newmont Corp ((NEM)) gained 9.9% and 8.3%, respectively, while smaller caps Westgold Resources ((WGX)), Ramelius Resources ((RMS)) and Capricorn Metals ((CMM)) enjoyed respective gains of 19.7%, 19%, and 15.9%.

The Energy sector lost -6.2% and was the worst performed in August largely due to a fall in crude oil prices, though several energy sub-groups also weakened including coal, uranium and refining.

Worse may be in store for the Energy sector, with Morgan Stanley anticipating a softer year ahead for oil and LNG, which dampens free cash flow and EPS outlooks for stocks under the analysts’ research coverage.

This broker has downgraded its industry view to In-Line from Attractive, with Overweight-rated Santos ((STO)) preferred and Beach Energy ((BPT)) the least favoured (Underweight).

Largely due to the 34% gain for the Technology sector over the last 12 months, Growth has outperformed Value by nearly 9 percentage points (ppts), explains Macquarie, after noting the 1.3ppt outperformance in August. Value has more exposure to the Resources sector which has lost -7.5% in the last year.

Macquarie attributes the 2.6ppt outperformance by large caps over small caps in August to growth concerns plus crowding into the largest stocks for equity exposure.

Australian mid caps led the market with a 2% gain, while the Small Ordinaries index lost just over -2% for the month. Energy, Discretionary and Industrials were largely responsible for the decline in the Small Ordinaries, with Financials and Real Estate the only positive contributors.

Commodity prices were mixed in August, notes UBS, with the CRB Commodity Index weakening by -0.4% to 277. 

Brent Oil fell by -US$1.92/bbl to US$78.80/bbl and iron ore prices fell by -0.5% to US$101/t. Thermal coal rose by 4.4%, while hard coking coal declined -8.9%.

Gold prices rose by US$87.05/oz over the month to US$2,513.35/oz due to dovish Federal Reserve expectations, lower rates, and a weaker US dollar, explains the broker.

Expecting ongoing Australian dollar strength until the Reserve Bank pivots to interest rate reductions, Macquarie notes the market currently factors a 20% chance of a cut in September.

In the US, the FedWatch tool, provided by CME Group, sees a 100% chance the Federal Reserve will lower interest rates in September, with a 31% probability for a -50bps cut.

Federal Reserve Chairman Jerome Powell made dovish remarks at the Jackson Hole Economic Symposium, indicating “the time has come for policy to adjust”.

The US dollar fell to its lowest level in over a year and all major currencies depreciated against the Australian dollar in August.

The US dollar Index (DXY) a measure of the value of the US dollar relative to a basket of foreign currencies, fell by -2.3% to 101.70 and the Australian dollar moved higher by 3.9% to US$0.6780.

As Macquarie’s FOMO Meter is above 1.0 again, there is an elevated risk of a correction, according to the broker, noting September is typically the worst month of the year for the ASX with negative returns in eight of the last ten years.

As the economic cycle is slowing, Macquarie expects defensive stocks will outperform.

Sector multiples also look stretched on Morgan Stanley’s one year view, with the exception of Energy and Materials.

For more on Australian banks, see further below.

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

Australian Banks

On average, the major banks outperformed the Australian market in August, despite releasing results in line with expectations during the reporting season.

Morgan Stanley highlights trends across the majors were similar, with stable margins, mid-single digit loss ratios, healthy provisions and large capital buffers.

The average major bank total shareholder return of 2.9% for the month beat the 0.5% return from the ASX200 index.

Among the majors, Westpac was the best performer with a 4.8% return (9.4% in July) while National Australia Bank ((NAB)) lost -1.1%. In between, shares in ANZ Bank and CommBank gained 4.6% and 3.3%, respectively.

For the smaller banks, Judo Capital ((JDO)) strongly outperformed with a gain of 18.3%, while Bendigo & Adelaide Bank ((BEN)) lost -3.5% and Bank of Queensland ((BOQ)) gained just 0.2%.

Morgan Stanley highlights the major banks’ average dividend yield of around 4.6% is 0.6% above the bond yield, which compares to the post-2010 average of 2.8% above the bond yield.

New Zealand

Similar to the 0.5% gain for the ASX200, the NZX50 gained 0.34%, after the Reserve Bank of New Zealand lowered the cash rate by -25bps.

This monthly gain brings the total return so far in 2024 to 5.75%. 

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