May In Review: Small Cap Shares Underperform

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While still outperforming global peers year-to-date, the ASX200 experienced a -2.6% loss (total return) in May as losses in the real estate and technology sectors outweighed a small gain in the materials sector.

-The ASX200 lost -2.6% (total return) during May
-Value outperformed growth, and large caps outperformed 
-The small ordinaries index lost -7%
-Brent crude oil rose by 12.3%, while iron ore lost -4.2%
-Macquarie forecasts a June 2023 cash rate of 2.25%.

Mark Woodruff

The ASX200 closed out May with a total loss of -2.6% (including dividends). Investors reacted to the Reserve Bank raising the cash rate by 25 basis points to 0.35% for the first time since 2010, and the index potentially suffered for its year-to-date outperformance versus global peers.

Australian stocks have gained 0.1% so far this year, compared to a -13% fall for the S&P500 in the US, where the Federal Reserve raised rates in May for the second time this year.

The ASX200 underperformed the Developed Market World's return of -0.2% in local currency terms during May. Meanwhile, the S&P500 in the US gained 0.2%, while Europe (ex the UK) and Emerging Markets both lost -0.1%.

In Australia, Value outperformed Growth, helped along by a relative overweight exposure to Materials and underweight exposure to Staples and Discretionary. Value has now outperformed Growth by 13.8% year to date.

All sectors trended lower in May, except for a modest 0.1% rise for Materials, which Macquarie attributed to easing covid restrictions and expectations for more stimulus in China. The Real Estate and Technology sectors were the worst performing, whilst Materials, Utilities and Industrials had the largest relative outperformance versus the ASX200.

Meanwhile, the large cap index outperformed the mid-and small-cap indices, with the Small Ordinaries experiencing a -7.0% loss. Small caps have a greater exposure to Real Estate and Discretionary compared to large caps, while the the large cap index is more exposed to Financials.

The outperformance of large caps now makes Size the best performing factor YTD over Value, Momentum and Quality, all of which made gains over the month.

Resources outperformed Industrials, with the differential greatest within the mid-caps. Commodity prices displayed mixed trends as supply chain pressures and the European Union’s ban on Russian oil imports lifted the Brent crude oil price, while the iron ore price fell on increasing covid restrictions in China and a slowing of the property cycle.

ASX100 Best and Worst Performers of the month (raw data only, dividends not included – same for the indices below)

ASX200 Best and Worst Performers of the month

ASX300 Best and Worst Performers of the month

ALL-TECH Best and Worst Performers of the month

REITs

For the month of May, REITs underperformed the ASX200 by -6.12%, resulting in a negative total return of -8.73%.

Ord Minnett felt the 0.25% cash rate increase by the RBA, as well as a volatile and rising long bond yield, affected market sentiment in the sector.

Credit Suisse attributed a multiple de-rating, as opposed to earnings outlook concerns, for the big relative underperformance by fund managers, while retail exposed names outperformed.

Irongate Group ((IAP)) gained 1.7%, while defensive REITs with resilient income streams, including Vicinity Centres ((VCX)) 0.8%, BWP Trust ((BWP)) -0.7% and SCA Property Group ((SCP)) -3.3% also outperformed.

Underperformers for the month included Centuria Capital Group ((CNI)) which lost -20.7% and Home Consortium ((HMC)) -17.2%, while REITs in the growth and diversified segment underperformed including Charter Hall Group ((CHC)) and Goodman Group ((GMG)), which lost -15.3% and -14.3%, respectively.

In the short term, Credit Suisse believes exposure to supermarket tenants (that pay turnover-based rent) will be supportive for Neutral-rated Charter Hall Retail REIT ((CQR)) and SCA Property Group.

Otherwise, the broker looks out 12 months and prefers Stockland ((SGP)) for diversification, Goodman Group from among the fund managers and Scentre Group ((SCG)) for regional mall exposure. Meanwhile, Lendlease ((LLC)) is recommended for value-focused investors.

Interest rates

In the US, the 10-year treasury yield fell by -3bpts to 2.85%, which UBS attributes to the assumption of an easing of the Federal Reserve’s plan to aggressively hike interest rates after key inflation metrics were reported in line with expectations. Sentiment has since changed on this front, with FOMC members last week shooting down talk of a possible pause in Fed aggression come September.

Meanwhile, in Australia the 10-year bond yield climbed by 7bpts to 3.35% as the Reserve Bank raised the cash rate by 25bps to 0.35%.

Reserve Bank cash rate futures indicate a 76% chance of a hike to 75bps in June 2022, while a cash rate of nearly 3.5% is indicated in 12 months. 

Nonetheless, Macquarie’s Macro Strategy team thinks the market is too hawkish and predicts a June 2023 cash rate of 2.25%.

Commodities

The CRB Commodity Index rose by 2.7% to 317 in May.

Brent crude oil rose by 12.3% to US$122.8/bbl.

Iron ore price fell by -4.2% to $US138.5/t.

The gold price decreased by -3.1% to US$1,837.4/oz.

Hard coking coal prices fell by -13.3%, while thermal coal increased by 30.7% during May.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, fell -1.2% to 101.75.

The Australian dollar rose by 1.6% to close out May at US71.77 cents, as commodity currencies generally strengthened, while the US dollar weakened

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