July In Review: ASX Rises While China Plummets

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Gains in the mining sector spurred a 1.1% rise for the ASX200 in July, while Chinese stocks had the largest monthly decline in nearly a decade.

-The ASX200 climbed 1.1% during July
-Mining was the best sector while Information Technology dragged
-Quality, Momentum and Growth outpaced Value
-Largest monthly decline in nearly 10 years for Chinese stocks
-JP Morgan upgrades its S&P500 year-end target to 4,600 from 4,400
-Stock picks coming into the reporting season

By Mark Woodruff

Total returns (including dividends) for Australian stocks in July amounted to 1.1% in July. The ASX200 lagged a 2.4% rise in the US for the S&P500, which had the strongest gain of the major markets.

The second quarter reporting season in the US and Europe has been very strong, leading JP Morgan strategists to upgrade their S&P500 year-end target to 4,600 from 4,400.

Overall, global markets had a mixed result in July, as the delta strain spread. The MSCI World Developed markets index rose 1.8% in US dollar terms, outperforming the Emerging Markets (EM) World index which dropped -6.7%.

The Chinese stock market was a drag on EM, falling nearly -14%, the largest monthly decline in nearly a decade. This was largely due to a regulatory crackdown coupled with ongoing concerns about slowing growth. Other global growth markets like Korea and Japan also fell -3.6% and -2.4%, respectively.

Growth outperformed Value in all key markets, except EM during July.

Back in Australia, Quality rose 2.5% for the month, supported by slowing cyclical momentum. Momentum and Growth increased 1.4% and 1.2%, respectively, outperforming Value which increased 0.4%. This trend is consistent with the fall in nominal bond yields that occurred during the month.

With a rise of 8.1%, Mining was the best performing sector in July, supported by gains in base metal prices. Industrials were next, up by 4.2%, and Utilities rose by 1.6%. Meanwhile, Information Technology fell by -6.9% and Energy declined – 2.5%. The latter is notable, given takeover talk in the sector and a flat oil price. The relative weakness of energy stocks indicates the sector may still be challenged given decarbonisation and the related ESG risks, suggests Macquarie.

Finally, takeovers were a dominant theme following offers for Sydney Airport ((SYD)) and Spark Infrastructure Group ((SKI)). 

ASX100 best and worst performers 

The best performing ASX100 stocks during the month were Sydney Airport rising by 34.9%, Spark Infrastructure Group 23.7%, and Mineral Resources ((MIN)) climbing by 17.3%. 

The worst performers were Crown Resorts ((CWN)) down by -27.7%, Afterpay ((APT)) -18.2% and Appen ((APX)) falling by -16.5%.

Emerging companies

The Small Ordinaries Accumulation Index rose 0.7% in July, underperforming the ASX100 by -0.5 percentage points.

The Small Industrials Index fell – 0.9%, while the Small Resources Index rose 7.4%.

Energy was the best-performing sector in July, rising 5.6%, followed by Materials 4.6% and Industrials increased by 3%. Meanwhile, Healthcare was the worst-performing sector, falling -4%, followed by Consumer Discretionary -3.3% and Financials declining by -3.1%.

Within the Small Ordinaries, outperforming companies included Perenti Global ((PRN)), up by 35.8%, Orocobre ((ORE)) 27.5%, Galaxy Resources ((GXY)) 27%, Australian Pharmaceutical Industries ((API)) 26.5%, Audinate ((AD8)) 22.5% and Life360 ((360)) rising by 19.3%.

Losers included Marley Spoon ((MMM)), falling by -30.7%, Piedmont Lithium ((PLL)) -28.3%, Polynovo ((PNV)) -20.2% and Data#3 ((DTL)) down by -16.8%.

Mining sector

Resources outperformed Industrials across all size indices with Small Cap Resources the best performing, rising by 7.4%.

By dint of its size, the 10% gain for BHP Group ((BHP)) led index gains, but lithium stocks IGO ((IGO)), Mineral Resources and Lynas Rare Earths ((LYC)) rose by 22%, 17% and 28%, respectively.

Fortescue Metals Group ((FMG)), which climbed 6.7%, and Rio Tinto ((RIO)) up by 5.4%, lagged the sector though outperformed the market. Given the iron ore price was down slightly over July, the strong returns from BHP Group, Rio Tinto and Fortescue Metals Group are at least partly due to their large dividends, notes Macquarie.

Technology sector

In the month of July, technology stocks underperformed the broader market, with the ASX technology index falling -5.2%.

In the US, the Nasdaq100 technology index rose 2.4%, while WAAAX stocks in Australia fell by -9.3%.

Regarding of WAAAX stocks, Afterpay’s market cap represented 43% of the WAAAX names in July. Given its size, Credit Suisse notes it will represent a major change to the ASX-listed technology sector when its increased share price, as a result of its deal with Square Inc, is included in August figures.

[WAAAX: WiseTech Global ((WTC)), Afterpay, Altium ((ALU)), Appen ((AX1)), Xero ((XRO))]

Within the technology index for July, the best performers were Weebit Nano ((WBT)), which rose 58%, Envirosuite ((EVS)) 44% and Tesserent ((TNT)) increased by 28%. Meanwhile, Marley Spoon fell -31%, Cettire ((CTT)) -24% and Laybuy Group ((LBY)) declined by -19%.

In order of preference, Credit Suisse likes Xero ((XRO)), Life360 ((360)), WiseTech Global, Audinate ((AD8)), Altium and Infomedia ((IFM)).

Sector rotation from technology due to rising interest rates is considered a risk. However, there are multiple companies under the broker’s coverage with strong, multiyear compounding growth outlooks, which are likely to continue to perform well.

Within travel names Credit Suisse continues to see upside for Corporate Travel Management ((CTD)) and Webjet ((WEB)), as global travel resumes in late 2021 and into 2022. Flight Centre ((FLT)) is the least preferred, due to longer term Leisure division concerns.

Australian Banks

The major banks underperformed the ASX200 by an average of around -3.1% in July.

Commonwealth Bank ((CBA)) fell -0.2% though did slightly better than Bendigo & Adelaide Bank ((BEN)) -1.0%, National Australia Bank ((NAB)) -1.1%, Bank of Queensland ((BOQ)) -1.5% and ANZ Bank ((ANZ)) -1.6%. Westpac Bank ((WBC)) underperformed the group falling by -5%.

Over the last six months, National Australia Bank is the only bank that has underperformed the market.

Despite the current lockdowns, Morgan Stanley believes price earnings multiples can continue to trade above long-run averages, given low interest rates, conservative earnings forecasts, rising dividends, capital management prospects and a lower overall risk profile.

Based on consensus estimates, the average major bank one-year forward dividend yield is around 4.7%, estimates the broker. This compares with a post-2010 average of circa 6.1%. On relative yields since 2010, banks are thought to be 'cheap' versus the ASX Industrials ex Banks, and the 10-year bond yield.

Australian consumer sector

While the ASX200 rose 1.1% in July, the Consumer sector performance was mixed, with Discretionary falling -0.5% month-on-month, while Staples gained 1.4%

Valuations appear full with Retail and Staples trading above long-term averages, according to Macquarie. 

Heading into the reporting season, the broker maintains its Outperform ratings for Coles Group ((COL)), Harvey Norman ((HVN)), Flight Centre, Webjet and Wesfarmers ((WES)).

Staples saw small EPS upgrades during July, likely due to the recent lockdowns, which should support heightened supermarket sales in the first half of FY22. 

Strength in Staples was supported by Endeavour Group’s ((EDV)) debut on the market, with the share price up by 5.4% for July, and 10.1% since its listing on June 24. This was offset by weakness in Bega Cheese ((BGA)) which fell -12.4%.

Interestingly, Retail also saw upgrades, driven by stocks exposed to home-related spending, such as Harvey Norman and Wesfarmers, notes the broker. Both stocks were the best performers within Retail, rising by 3.5% apiece.

Within Retail, JB Hi-Fi ((JBH)) was down -5.0% after providing preliminary FY21 numbers and a strong trading update, though the impact of lockdowns on CBD stores and supply-chain risk continue to weigh.

Macquarie prefers Coles Group over Woolworths Group ((WOW)) within Staples in the lead-up to results season. Within Discretionary, the broker maintains its Outperform ratings on Wesfarmers and Harvey Norman, as they continue to benefit from strong housing activity. The latter should also benefit from high-margin furniture sales in the second half.

REITs

REITs returned 0.3% in July, underperforming the ASX200 by -0.8%, despite a significant fall in the Australian 10-year bond yield.

For the past 12 months REITs returned 32.8%, outperforming the overall market, which returned 28.6%.

Globally, REITs were up 2.6% in July in US dollar terms. For the past 12 months, Global REITs have returned 31.2% in US dollar terms.

Back in Australia, Industrial REITs returned 6.7%, Diversified REITs -1.7%, Retail REITs -2.3% and Office REITs fell -2.5% over July.

Outperformers included National Storage REIT ((NSR)) which rose 7.6%, Goodman Group ((GMG)) 6.9% and Centuria Capital Group ((CNI)), which increased by 5.0%. 

Key underperformers were Ingenia Communities Group ((INA)), which fell -5.7%, Stockland ((SGP)) -5.6% and Scentre Group ((SCG)), which declined by -5.1%.

Emerging Markets

Emerging markets sold-off in July following the announcement of regulatory changes in China. Overall, Emerging Market underperformed developed markets by -8.8%.

The MSCI China index fell -14.1%, while Chinese stocks in the US and Hong Kong markets sold off as well.

This negative reaction has been primarily focused on the companies in the new economy sectors that are most impacted, such as Tencent, which fell -18.0% and Meituan which crumbled by -32.9%. The Chinese education sector was also severely impacted following the announced ban on foreign capital on K9 academic tutoring institutions.

JP Morgan’s China economists reflect on circumstances in 2018, when corporate deleveraging, rising defaults, housing market tightening and regulatory restrictions raised similar concerns.

Commodities

The CRB Commodity Index was up 2.2% for July.

Oil prices sold off in July after OPEC talks initially fell apart early in the month and global concerns around the delta variant spread. Brent Oil prices dropped -US$2.23/bbl to US$72.89/bbl.

The global commodities team at JP Morgans remain focused on Brent prices in 2022, and estimate that for prices to remain at US$80/bbl, OPEC would need to leave 2mbd of production offline next year. 

Iron ore prices were weaker in July and fell by -$US24.50/t to $US191/t.

Gold prices rose US$48.3/oz to US$1,811.45/oz, while in base metals aluminium rose 2.6%, copper 3.8% and nickel jumped 7.3% during July.

Interest rates

The Australian 10-year bond yield fell -35bps to 1.18%, while the US slid -15bps to 1.23% as global bond yields continued retracing in July from previously elevated levels

The fall was driven by lower real yields, which are now below the lows of 2020. While yields often fall during a slowdown, the plunge is surprising to Macquarie, given the Federal Reserve is still moving towards tapering, which drove a material spike in real yields in 2013.

JP Morgan’s US rate strategists have calculated the implied growth expectations from the current level of 10-year yields. They imply a near -4% downgrade to the broker’s US GDP growth forecasts, suggesting just 0.5% real growth over the next year.

However, as headline and underlying CPI saw strong increases in the second quarter, Morgan Stanley expects inflation pressures to continue to build.

Foreign Exchange

The US Dollar Index (DXY), a measure of the value of the US Dollar relative to a basket of foreign currencies, was flat during July.

The Australian dollar declined -2.1% during July to close at US73.5 cents, after the more dovish-than-expected Reserve Bank meeting and the announcement that the Reserve Bank of New Zealand will end its QE program. The lockdowns in Sydney also caused some uncertainty about the Australian economy. 

The strategists at JP Morgan downgraded third quarter forecasts to US75c from US77c though now see the outlook for the Australian dollar as more balanced. The broker rates the RBA as the most dovish central bank in the G10.

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