January In Review: Interest Rates Weigh On Growth Stocks

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Losses in the information technology and healthcare sectors outweighed energy gains leading to a -6.4% total decline for the ASX200 in January, as the spectre of rising interest rates increased volatility.

-The ASX200 lost -6.4% (total return) during January
-Value outperformed growth
-Energy was the best performing sector while info tech was the worst
-Morgan Stanley notes banks are trading at a historically high discount
-Australian 10-year bond yields climbed by 13 basis points

Mark Woodruff

Australian stocks underperformed global counterparts in January, in what was the fourth worst start to a year since 1960.

The ASX200 closed out January -6.4% lower on a total return basis (including dividends).

The Developed Market (DM) World index outperformed the ASX200 though still declined by -4.9%, in US dollar terms. A rise in commodity prices provided some cushion for Emerging Market equities, which fell by -1.9%.

The S&P500 dropped by -5.2% across January in the US, where Value is now ahead of Growth by nearly 10 percentage points over the past year.

In Australia, Value outperformed Growth by 8.5ppts in January, driven by gains in the Energy and Mining sectors, while rising real yields drove down the prices of Growth stocks. Value is now outperforming over the one-to-three-year time frame.

Large caps were preferred over mid and small caps, while Resources outperformed Industrials.

Energy was the top performing sector, rising by 7.9% on a total return basis. The only other positive sectors were Utilities and Materials, up by 2.6% and 0.8%, respectively. The largest falls were reserved for Information Technology and Healthcare which fell by -18.4% and -12.1%, respectively.

Ord Minnett estimates 80% of ASX-listed stocks are languishing in correction territory (compared to 52-week highs) though notes earnings have turned higher for most sectors. In short, a significant de-rating of price/earnings multiples has occurred.

Bonds outperformed domestic equities by 4.7% over January. While short-term interest rates rose in response to a hawkish shift from central banks, the 10-year bond yield rose less. Such a flattening yield curve is construed by Macquarie to be a sign of weakening growth.

Meanwhile, the US dollar rose, while the more growth sensitive Australian dollar fell by -2.7%.

ASX100 best and worst

The best performing ASX100 stocks during January were AGL Energy ((AGL)), which rose by 14.6%, Rio Tinto ((RIO)) 14.3%, Beach Energy ((BPT)) 14.0%, BHP Group ((BHP)) 12.6%, Woodside Petroleum ((WPL)) 12.3% and Santos ((STO)), which climbed by 9.85%.

The worst performers were WiseTech Global ((WTC)) which fell by -28%, Xero ((XRO)) -23.8%, Reece ((REH)) -22.8%, Altium ((ALU)) -22.2%, Charter Hall Group ((CHC)) -20.5% and Reliance Worldwide ((RWC)), which fell by -19.5%.

Emerging companies

The Small Ordinaries Accumulation Index fell by -9% in January, underperforming the ASX100 by -2.9ppts.

The Small Industrials Index declined by -9.8%, underperforming the ASX100 Industrials by -1.4ppts, while the Small Resources Index fell by -5.9%, underperforming the ASX100 Resources by -9.8ppts.

In terms of sectors, Energy was the best performer and rose by 1.4%, followed by Telecommunication Services which fell by -2.6%.

On the flipside, Healthcare was the worst performing sector over the past month, dropping by -14.4%, followed by Financials and Consumer Staples which fell by -8.2% and – 7.3%, respectively.

The best performing stocks were Brainchip Holdings ((BRN)) which leapt by 100%, followed by Champion Iron ((CIA)) 17.4%, Beach Energy ((BPT)) 14.0% and Karoon Energy ((KAR)) 9.5%.

The worst performers were Redbubble ((RBL)) which plummeted by -47.4%, Nuix ((NXL)) -38.7%, Australian Ethical Investment ((AEF)) -34.0%, Zip Co ((Z1P)) -31.8%, Dubber Corp ((DUB)) -31.7% and Kogan.com ((KGN), which fell by -31.5%.

Banks

The average total shareholder return of the major banks for January was -5.4%, which was ahead of the -6.4% fall for the ASX200.

ANZ Bank ((ANZ)) and Westpac ((WBC)) were the relative outperformers, while Commonwealth Bank ((CBA)) was the worst with a fall of -7.2%.

According to Morgan Stanley, the average price/earnings-multiple-discount of the major banks, relative to the All Industrials ex-Banks, is around -43%, based on consensus estimates. 

The only other time in the last 20 years this discount has been greater than -40% was during the initial covid turbulence in the June 2020 quarter.

The broker feels that if investors can gain some comfort (on earnings and margins) during the pending February reporting season, an expectation for rising interest rates could well be the catalyst to reverse sentiment.

Financials ex-Banks

Australian Financials ex-Banks were not immune to the overall negative shift in market sentiment due to the interest rate outlook.

Buy-now pay-later (BNPL) stocks and assets managers underperformed.

The insurers and Computershare ((CPU)) outperformed the ASX200 with a less than -2% correction, on less severe catastrophe insurance costs for the former, and positive rates leverage.

On a total shareholder return basis, Zip Co led the sector down with a -27% fall, followed Netwealth ((NWL)) -14%, Praemium ((PPS) -14%,  AMP ((AMP)) -13%, Pendal Group ((PDL)) -13%, Challenger ((CGF)) -12%, Janus Henderson Group ((JHG)) -12%, Magellan Financial Group ((MFG)) -12%, nib Holdings ((NHF)) -11%, ASX ((ASX)) -10%, Macquarie Group ((MQG)) -10% and Perpetual ((PPT)), which fell by -9%.

REITs

REITs underperformed the broader ASX200 and were down -10.79% in January, with the rise in bond yields the key driver, according to Credit Suisse.

Fund managers were amongst the biggest underperformers, with Charter Hall Group falling by -18.6%, Home Consortium ((HMC)) -18%, Centuria Capital Group ((CNI)) -15.1% and Goodman Group ((GMG)) declining by -12.5%.

The fall for the sector requires some context. On a rolling 12-month basis, REITs ended January up 17.3%, outperforming equities by 7.6% over the period.

Meanwhile the sub-category of fund managers has had several periods of outperformance relative to the sector. As a result, Credit Suisse concludes fund manager multiples have de-rated relative to the balance of the sector, as opposed to there being expectations of material earnings risk .

Looking forward, the broker feels a big focus this reporting season will be how individual REITs are hedged against inflation/rising interest rates. However, it’s thought any negative earnings risk more relates to FY23 and beyond.

Irongate Group ((IAP)) was one of the few winners and rose 6.6% on the back of a takeover bid. On a relative basis other outperformers were Vicinity Centres ((VCX )) which fell by -3.6%, RAM Essential Services property Fund ((REP)) -4.0% Waypoint REIT ((WPR)) -4.2% and BWP Trust ((BWP)), which fell -4.3%.

Interest Rates

In the US, the 10-year treasury yield rose by 18 bpts to 1.78%, while in Australia the10-year bond yield climbed 13 bpts to 1.90%.

At its first meeting for the year, the RBA kept the cash rate at 10 basis points, with hikes now primarily dependent on wage inflation. 

Economists at Ord Minnett don’t expect conditions for a rate hike to be met until the fourth quarter of this year.

Commodities

The CRB Commodity Index rose by 9.8% to 255 in January.

Brent crude oil increased by 17.3% to US$91.20/bbl.

Iron ore prices jumped by 20.8% to $US148t.

The gold price declined by -1.8% to US$1,797.2/oz.

Meanwhile, it was a great month for hard coking coal and thermal coal, rising by 24.4% and 31.3%, respectively.

Foreign Exchange

The US Dollar Index (DXY), a measure of the value of the US Dollar relative to a basket of foreign currencies, closed up 0.9% to 96.54.

And finally, the Australian dollar fell by -2.7% to close out January at US71.00 cents.

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