November In Review: ASX Soars As Value Outperforms Growth

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During November the ASX200 recorded the best monthly return since 1993, with the energy and banking sectors leading the way

-The ASX200 climbed 10.2% during November 
-Value and Cyclicals outperformed
-A FY21 expectation for greater than 10% earnings growth

By Mark Woodruff

The ASX200 index remains one of the best performing equity markets globally, ranking above all peers quarter-to-date. It is now in positive territory, up 0.2% for 2020.

The ASX200 accumulation index returned 10.2% in November, the best monthly return since 1993, as vaccine news drove price/earnings (PE) expansion and a shift to value. While it has been over three decades since the last monthly double-digit gain in Australian stocks, this happened eight times in the 1980’s.

Global markets were strong during the month. While the outcome of the US election was taken positively by markets, the real driver of the global rally in stocks was the vaccine news. Now investors have a clear line of sight on the end of the pandemic, and a normalisation of the economy.

In the US the S&P500 rose 11.3% but still underperformed slightly against the developing markets (DM) world return of 12.8%. 

The world developed markets outperformance was led by the Euro Stoxx Index, which rose by 22.5% in US dollar terms. By comparison world emerging markets underperformed slightly, lifting by 9.3% in US dollar terms. 

The Nikkei225 Index also rose sharply, up by 15.1% in November.

Australian Stockmarket by Sector

Covid-19 losers were the best performers in November with Energy rising by 28%, Financials up 16% and Value stocks in general increasing by 16%.

In the Financial sector, gains were made across all the banks with the Commonwealth Bank ((CBA)) being the highest contributor for the second month in a row. The Materials sector was the next best performer with BHP Group ((BHP)) the top contributing stock.

Consumer Staples was the only negative sector, with Utilities the other notable laggard, while Resources fared better than Industrials across most of the size indices.

The Small Ordinaries closed the month 10.3% higher in November, outperforming the MidCap50 (6.6%) index and in-line with the Large Cap (10.9%) index. The Small Ordinaries had no detractors in the month with Materials and Financials the top performers, while Info Tech and Staples were the laggards.

At a stock level, Mineral Resources ((MIN)) contributed the most to returns followed by IDP Education ((IEL)). Meanwhile, while Kogan.com ((KGN)) was the largest detractor from the Small Ordinaries.

For the year-to-date, the Technology segment is leading the market by a significant margin with a return of 44.1%. It has been the top performing segment in five of eleven months. 

The most significant sector rotations occurring in November were reflected by Energy returning 28.4%, Banks 18.3% (following on from a 6.9% return in October) and Insurance 14.9%.

Retail REITs were also strong performers, with Unibail Rodamco Westfield ((URW)) the best with a gain of 73%.

The Energy sector’s rise of 28% paced the 27% rise in oil prices. The sector is still down -28% on a year ago and should continue to benefit from reopening and increased economy activity (especially flights & cruises), notes Macquarie.

Defensives were the laggards, with Staples (down -0.7%) the only sector in the red, but Utilities (up 1.5%) and Health (up 2.9%) also lagged the market.

Travel stocks were among the biggest winners last month, with Webjet ((WEB)) jumping 65%, Flight Centre ((FLT)) up 52% and Corporate Travel Management ((CTD)) increasing by 37%. 

Some travel stocks are trading near pre-covid highs when adjusted for capital raising dilution. Macquarie highlights that whether you remain bullish on travel likely depends on whether you expect a boom when travel returns to normal.

Best and Worst Australian Stocks within Indices

The best performing ASX100 stocks during the month were Flight Centre rising by 52.0%, Beach Energy ((BPT)) up 49.2% and Oil Search ((OSH)) with a 41.6% gain.

The worst performers were Saracen Mineral Holdings ((SAR)) falling by -16.5%, Northern Star Resources ((NST)) by -15.1% and Domino's Pizza Enterprises fell -12.6%.

Among the Small Ordinaries, the best performers were Unibail Rodamco Westfield up by 73% (as previously mentioned), Pilbara Minerals ((PLS)) rising 69.1% and Webjet up 65.3%.

The worst performers were Kogan.com falling -20.3%, Alkane Resources ((ALK)) down by -17.9% and Silver Lake Resources ((SLR)) off by -16.1%.

Value versus Growth

For the ASX200 Industrials ex-financials, value outperformed growth by 7.2% on the 10th of November, the most in a single day trading since at least the 2000's.

Rising by 16% for November, value stocks had a strong month relative to growth, which only rose 4%. The former included more covid-19 losers that had lagged in the recovery. 

Of interest to Macquarie is some growth stocks underperformed in November despite AGM updates that suggested current earnings momentum had continued. At the same time, some value stocks (travel a good example) saw a strong re-rating as investors looked forward to the economy returning to normal.

Cyclicals versus Non Cyclicals

During November, cyclicals produced an average return of 13.9% and non-cyclicals produced an average return of 8.0%.

Year to date on a cumulative basis, non-cyclicals are leading with returns of 5.1% versus cyclicals at -4.9%.

Credit Suisse has defined cyclicals as incorporating Real Estate, Consumer Discretionary, Energy, Materials and Industrials. Meanwhile, non-cyclicals have been defined as incorporating Banks, Diversified Financials, Insurance, Consumer Staples, Health Care, Technology, Communications Services and Utilities.

Non-bank Financials

Non-bank financials' returns were mixed in November, with value exposed stocks outperforming. These stocks included Platinum Asset Management ((PTM)) rising by 36% and Perpetual ((PPT)) climbing 23%.

Other value stock performers included IOOF Holdings ((IFL)), Suncorp Group ((SUN)) and QBE Insurance Group ((QBE)), while Insurance Australia Group ((IAG)) lagged insurance peers on business interruption headwinds.

Growth/Technology stocks underperformed the broader market, including Afterpay ((APT)), ASX ((ASX)), Zip Co ((Z1P)) and Magellan Financial Group ((MFG)).

Technology

While underperforming the broader market, the technology sector still eked out a mid-single-digit increase for the month. This was despite the re-opening theme having a dampening effect on the sector as money gravitated toward value stocks.

The ASX All Technology index was up 6.1% (versus the ASX 100 up 9.9%), in a month when the Nasdaq100 Technology index rose 12.7%.

Within the technology index, Webjet rose 65%, Atomos ((AMS)) increased by 58% and Alcidion Group ((ALC)) was up by 50%.

The worst performers were Kogan.com ((KGN)) which fell -20%, Pushpay Holdings ((PPH)) declined by -18% and Fineos Corp ((FCL)) fell by -17%.

WAAAX stocks climbed 5.4% for November. These include WiseTech ((WTX), Altium ((ALU)), Appen ((APX)), Afterpay and Xero ((XRO)).

Real Estate Investment Trusts

REITs outperformed the broader ASX200 by 3.04% in the month of November. This was largely the result of positive news on the covid-19 vaccine.

While many REITs continue to trade below pre-covid highs, only a handful in the Credit Suisse coverage continue to trade at a discount to net tangible assets (NTA). These have either regional retail or CBD office exposure (or both). Here, there are still considered to be ongoing headwinds at an earnings level for the latter and structural changes for the former.

In terms of undervalued asset-plays, the broker considers the low bond yield environment should continue to be supportive of the broader sector.

Outperformers were Vicinity Centres ((VCX)), Scentre Group ((SCG)) and Mirvac Group ((MGR)) which rose 36.4%, 33.3% and 22.3%, respectively.

Petrol station exposures in APN Convenience Retail REIT ((AQR)) and Waypoint REIT ((WPR)), took a breather, and Charter Hall Long Wale REIT ((CLW)) and Centuria Industrial REIT ((CIP)) were also relative underperformers for the month.

Regarding stock preferences, Credit Suisse continues to see absolute value in Charter Hall Retail REIT ((CQR)) and Mirvac Group, which are both rated Outperform.

While rated Neutral, the broker also sees value re-emerging in Centuria Industrial REIT and Goodman Group ((GMG)).

The Equity Outlook

Australia is well positioned with Reserve Bank of Australia quantitative easing on automatic pilot (at least $5bn per week), according to Macquarie. In addition, there is fiscal stimulus and a lack of domestic covid-19 cases.

The broker believes analyst forecasts are too conservative, as ASX200 earnings rose just 1% even as stock prices rose 10%. All else being equal, by bringing forward the end of the pandemic, the broker believes the positive vaccine news should have led to earnings upgrades for the December half of 2021. The PE spike in covid-19 losers is likely the market signalling that EPS upgrades are coming.

Morgan Stanley believes the trend of value outperforming growth can continue. The broker’s outlook remains for cyclicality in equities, with sector calls toward materials, reopening plays and financials.

Worldwide, the broker’s outlook for equities is a clear expectation for strong double digit earnings growth across all major markets. Morgan Stanley expects this to feature in 2021 for Australia with circa 20% expected. The nuance is that this will be a calendar year story for Australia.

In Australia, Ord Minnett remains strongly of the view that conditions are in favour of cyclicals and value.The burgeoning recovery in earnings and dividend expectations is considered to provide evidence of momentum in the upswing.

A range of key indicators (employment, housing sentiment, consumer sentiment, corporate confidence) are recovering strongly or at multi-year highs.This positive backdrop, alongside undemanding valuations for two of our largest sectors, financials and materials, underpins the broker’s positive view on Australia in absolute and relative terms.

Globally, the economists at Ord Minnett, still foresee an “incomplete recovery”, although they expect a marked uplift in growth in the second half of 2021, with the fourth quarter predicted to grow at 4.7% quarter-on-quarter.

Bond Markets

Australian ten-year bond yields rose 0.7% to 90 basis points, despite the best efforts of the RBA.

On November 3, the RBA announced its new $100bn QE program. The central bank announced that over the next six months, they will buy $100bn worth of government bonds with maturities of 'around five to ten years.' Alongside the QE program, the RBA also announced a rate cut, as they reduced the cash rate from 10 basis points from 25.

The RBA expects the 'combination of …bond purchases and lower interest rates … to assist the recovery by: lowering financing costs for borrowers, contributing to a lower exchange rates and by supporting asset prices and balance sheets.'

Global bond yields stayed put in November, with the US ten-year government bond yield unchanged at 85 basis points. In the final few weeks yields fell, signalling the potential for more easing in the US in response to rising covid cases, notes Macquarie.

However, credit spreads continue to fall, which is a positive signal for the expansion, explains the broker.

The Ord Minnett global fixed income strategists anticipate a modest lift in long-end yields next year, with targets 10–40 basis points above current levels.

Commodities

The CRB Commodity Index rose 10.6% to 160, in the month of November.

Iron ore rose 11% to US$131.5/t, while Brent Crude was up 27% to US$47.6/bbl.

Gold fell again in November, down -5.4% to US$1777/oz.

The 27% rise in Brent and an 11% rise in copper are positive signals for the global expansion, notes Macquarie. While the -5% fall in gold is considered another indicator of the rotation away from more defensive assets that benefited from low bond yields.

Currencies

The Australian dollar rose 4.5% during November to finish at US73 cents.

The US dollar weakened against major developed and emerging market currencies for the month.

The Ord Minnett currency strategists expect the US dollar to decline further in 2021.

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