September In Review: Banks versus Miners

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Policy announcement in the US and China spurred gains in September leaving investors in a quandary over bank exposures versus resource stocks.

-ASX200 gained 3.0% (total return) in September
-Materials & Technology rally, Staples & Healthcare weigh
-Value outperforms Growth as mining equities rally
-The Australian dollar has risen strongly over the past two months

By Mark Woodruff

In its fifth consecutive monthly advance, the ASX200 gained 3.0% (including dividends) in September supported by lower bond yields as the US Federal started an easing cycle which was complemented by surprise stimulus announcements in China.

US 10-year yields fell by -13bps to 3.79, while the Australian 10-year government bond yield rose by just the 1bp to 3.97%.

Market positioning moved towards Materials at the expense of Banks as the US/China easing cocktail lowered the risk of global hard landing scenarios, explains Morgan Stanley.

UBS points out Australian Bank share prices have still underperformed miners on a 10-year comparison.

Up to early-September, Banks had outperformed the Resources sector by up to 60% year-on-year, but by September’s close, this gap had narrowed to 37% (illustrating just how fierce the switch in between the two local heavyweight sectors has been).

The analysts at UBS highlight leadership cycles have tended to last for five years, which implies the divergence we have seen so far this year could still persist.

Regarding offshore equities, the MSCI All country World Index rose by 2%, with the Developed Markets index increasing by 1.5%.The MSCI China Index returned 23.9% and the broader MSCI Asia ex Japan Index climbed by 7.6%.

In the US, the S&P500 and the Information Technology sector gained 2.10% and 2.49%, respectively.

Back in Australia, the Materials sector gained 13% on Chinese stimulus to support the property market, with the authorities promising more is forthcoming. The Technology and Real Estate sectors also gained 7.4% and 6.6%, respectively, while Healthcare and Staples lost -3.2% and -1.7%, respectively.

While Technology was supported by lower bond yields, analysis by Macquarie has highlighted the sector also has the strongest earnings momentum of any ASX sector.

The re-rating for the Mining sector on the expectation Chinese stimulus will drive upgrades is on shakier ground, according to this broker, with EPS forecasts falling in the month.

Within sectors, Materials were supported by BHP Group ((BHP)), the largest single stock contributor for the month, and Rio Tinto ((RIO)).

Rounding out the top five index contributors were Goodman Group ((GMG)), Macquarie Group ((MQG)) and Fortescue ((FMG)).

On the flipside, CSL ((CSL)) was the biggest index detractor for the month, along with the other notable September laggards of CommBank ((CBA)), National Australia Bank ((NAB)), Woodside Energy ((WDS)), and Computershare ((CPU)).

All size biased indices closed higher for the month, with dividend contributions providing the additional lift. 

The Small Ordinaries posted the best return for the month of just over 5%. Here, Materials were responsible for a third of the positive index return, explains Morgan Stanley, followed by Discretionary and Real Estate.

By way of explanation for the outperformance by small caps, the broker points out this part of the market has greater exposure to Discretionary and Real Estate relative to large cap exposures where Financials weigh most.

Value outperformed Growth by 3.9 percentage points driven by the rotation to mining stocks away from banks. The weaker Healthcare sector also boosted Value as earnings forecasts declined for CSL, Ramsay Health Care ((RHC)) and Cochlear ((COH)) partly in response to a stronger Australian dollar.

By contrast, there was a small outperformance by Growth in the US as that market has just 0.4% weight in Mining compared to 19% on the ASX, explains Macquarie.

The CRB Commodity Index jumped by 2.9% in September to 285. Iron ore led the way with an 8.4% lift to US$109.5/t, while copper and gold climbed by 6.4% and 5.2%, respectively.

The gold price increased by US$148.05/oz over the month to US$2,661.85/oz.

Market participants keep waiting for pullbacks to build gold exposure, notes UBS, but the lack of opportunities has likely amplified sharp moves up as investors chase prices higher.

On the other hand, Brent Crude oil declined by -8.9% in September, while thermal coal and hard coking coal adjusted by -0.8% and 5.9%, respectively.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, fell by -0.9% to 100.7 at the end of the month.

The weaker DXY, combined with higher commodity prices and a relatively hawkish RBA (compared to the Fed) helped propel the Australian dollar 2.2% higher to around US$0.6900, backing up the near 4% gain in August, highlights Macquarie.

According to the CME Group FedWatch Tool, the probability of the Fed cutting interest rates again on November 7 stands at 100%, but the debate is largely whether the second cut will be by -25bps (63% chance) or -50bps (37%), explains the broker.

In Australia, the odds are 19% for a Reserve Bank interest rate cut on November 5.

UBS now expects a -25bps cut in February next year (previously May), followed by -25bps cuts every quarter thereafter. It’s felt the Australian 10-year yield is yet to reflect this more dovish stance as it was largely unmoved in September.

Macquarie’s measure of equity sentiment rebounded to 1.29 by the end of the month after approaching 1.00 before the US rate cut, a weaker US dollar, and Chinese stimulus efforts buoyed market participants.

This broker cautions October often results in equity volatility, which may be further heightened this year by the upcoming US Presidential election.

Morgan Stanley suspects a further rotation to Materials is dependent on higher commodity prices, greater acceptance of a soft landing, and policy evolution in China.

This broker’s current sector bias is towards large-cap resources while also retaining a degree of quality growth and defensiveness should the market conviction fade for a soft landing.

For more on Australian Banks and the REIT sector 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

Morgan Stanley retains a negative stance on the major Australian banks, as share prices still imply nothing goes wrong in 2025, while US rate cuts and Chinese stimulus should continue to support a rotation out of the sector.

Responding to policy measures in China, the major banks underperformed the ASX200 by an average of -6.5% over the week ending September 27, note the analysts.

The underperformance was around -3.8% for the month, with the average major bank total shareholder return (TSR) of -0.8%.

Moreover, the current average one-year forward PE multiple is well above the 10-year average and the 3-year post-covid average, notes Morgan Stanley.

The broker believes current trading multiples and earnings estimates for the majors already capture the potential benefits of rate cuts, a strong economic rebound, a benign competitive environment, a low risk profile, as well as active capital management.

Among the majors, Westpac ((WBC)) was the best performer with a gain of 1.5% and CommBank the worst with a -2.9% retreat.

The major banks’ average dividend yield of circa 4.6% is 0.7% above the 10-year bond yield, notes UBS, which compares with a 10-year average of 3.2% and is around its lowest level since February 2011.

Morgan Stanley’s major banks order of preference is National Australia Bank, Westpac, ANZ Bank ((ANZ)), and CommBank.

Australian Financials Ex-Banks

Shares in Macquarie Group ((MQG)) gained 8% in September, benefiting from faster US rate cuts and a potential recovery in corporate activity, according to Morgan Stanley.

On the flipside, the broker points out lower rates are a headwind for Computershare, with the shares losing -11% for the month.

Elsewhere, QBE Insurance ((QBE)) gained 5%, after losing -10% in August, as investors digest lower pricing and rates, suggest the analysts.

Australian REITs

Over September, REITs in the Industrial, Diversified, Office, and Retail space returned 10.5%, 5.4%, 5.0%, and 2.6%, respectively.

In the opinion of UBS, gains were supported by the -50bps cut in interest rate by the US Federal Reserve, as domestic rates are expected to follow with an around five-month delay.

While high hedging limits the benefit of lower debt costs in FY25, the analysts note a potential earnings tailwind in FY26 should base rates remain at this level/decline further.

Keeping other factors constant, a -100bps reduction would lift the broker’s EPS forecasts for Australian REITs by 5% on average across the sector.

Key outperformers over September include Centuria Capital ((CNI)), Goodman Group and Charter Hall ((CHC)) with rallies of 21.2%, 10.7% and 10.2%, respectively.

Underperformers include Ingenia Communities ((INA)), Charter Hall Retail REIT ((CQR)) and Vicinity Centres ((VCX) which weakened by -3.3%, 0.8% and -0.5%, respectively.

New Zealand

The NZX50 Index lost -0.19% in September following gains made in August after an interest rate cut by the Reserve Bank of New Zealand.

The year-to-date gain for the NZX50 is now 5.55% compared to the 12.33% for the ASX200.

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