August In Review: Resources Drive ASX Gains

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Despite higher bond yields weighing on the real estate sector, the ASX200 gained 1.2% in August, driven by a strong resource sector, and outperforming global equities.

-The ASX200 gained 1.2% (total return) during August
-Value outperformed Growth and Energy was best
-Real Estate, Technology and Financials the worst performers
-The Australian 10-year bond yield rose by 54bps to 3.60%
-Commodity prices continued the downward trend from April
 

By Mark Woodruff

The ASX200 gained 1.2% (including dividends) in August, outperforming global equities that, late in the month, were weighed down by hawkish commentary from the Federal Reserve in the US.

The MSCI Developed Markets Index lost -3.4%, while the S&P500 in the US lost -4.1% in local currency terms. Europe ex UK lost -4.7%, while Emerging Markets gained 1.2%.

Performance for the ASX200 was driven by a 5.9% gain by Resources, with Energy (7.8%) the best performer, despite a fall in crude oil prices.

Macquarie attributes gains in Energy to a rise in real yields, which pressures valuations across most Industrial sectors and led to increased allocations to cheaper sectors. A better-than-expected dividend for Woodside Energy ((WDS)) also assisted.

Real Estate was the worst performing sector, losing -3.2%. Macquarie points to weaker-than-expected FY23 guidance by many REITS during the August reporting season on top of the high negative correlation of the sector to rising bond yields.

Rising yields contributed to the general underperformance of Growth stocks, in contrast to factor style outperformances by Momentum, Quality and Value. Value outperformed Growth by 2.6% for the month and continues to outperform year-to-date.

Mid caps outshone both their larger and smaller counterparts in August, with the Midcap50 gaining 4%. The Small Ords index rose 0.6% in August, underperforming the large caps.

At the individual stock level, BHP Group ((BHP)) and Woodside Energy were the largest contributors to the ASX200 performance, while CommBank ((CBA)) was the largest detractor, with Financials the second worst sector behind Real Estate.

On Morgan Stanley's assessment, companies reported broadly in line with consensus expectations during the reporting season, but companies issued more downgrades than upgrades to forward guidance.

At the beginning of the month, the Reserve bank of Australia increased the cash rate by 50bps to 1.85% and bond yields rose by 54bps for the month.

Commodity prices have weakened since April due to concerns about global growth and China stimulus, according to Macquarie.

The US dollar continues to strengthen, but more against the Euro and Japanese Yen than the Australian dollar.

ASX100 Best and Worst Performers of the month

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

Emerging companies

The Small Ordinaries Accumulation Index gained 0.6% in August, underperforming the ASX100 Index by -0.7 percentage points (ppt).

Small Industrials declined by -1%, underperforming the ASX 100 Industrials by -0.7ppt. Small Resources gained 5.9% and underperformed the ASX100 Resources by -0.1ppt.

Energy was the best performing sector for the month gaining 6.4%, followed by Materials and Industrials which gained 4% and 3.7%, respectively.

Real Estate performed worst and lost -5.0%, followed by Information Technology (-4.9%) and Health Care (-3.1%).

Nearmap jumped by 49.64% after the board unanimously recommended the Thomas Bravo takeover offer of $2.10/share. Tyro Payments and Lovisa Holdings ((LOV)) climbed by 46.99% and 30.6%, respectively, after both reported stronger-than-expected FY22 results.

On the flipside, PPK Group ((PPK)) fell by -42.55%, while Redbubble ((RBL)) and Appen ((APX)) shares retraced -39.83% and -35.69%, respectively, after issuing disappointing results during the August reporting season.

Banks

The average total shareholder return for the major banks of -0.3% in August underperformed the 1.2% gain by the ASX200.

Price earnings multiples for regional banks de-rated by an average of around -1% for the month, resulting in a significantly worse performance compared to the major banks.

Bendigo and Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) lost -12% and -6.5%, respectively, compared to CommBank -1.2%, ANZ Bank ((ANZ)) -0.3%, and with National Australia Bank ((NAB)) not losing anything and Westpac Bank ((WBC)) gaining 0.5%.

Based on consensus estimates, Morgan Stanley notes the average major bank one-year forward dividend yield is around 5.5%, which compares with a post-2010 average of circa 6.0%.

REITs

REITs have now underperformed the broader ASX200 by -7.67% on a rolling 12-month basis, after a -4.7% relative underperformance for August.

This follows the 54bps increase in yield for the Australian 10-year bond over the month due to ongoing inflation concerns.

The biggest learning for Credit Suisse from a reporting season that held few surprises around FY22 results for REITs under coverage, was the sooner-than-expected recovery in large retail mall portfolios. Rent relief was lower than expected and in some cases prior period provisions were reversed.

FY23 earnings guidance was generally lower than expected, with rising debt costs for REITs leading to downward revisions to the broker’s earnings forecasts, after a review of debt hedging profiles.

The analyst notes sector occupancy has risen over the year and retail sales are showing signs of improvement, as are Retail re-leasing spreads. Office incentives trended higher though are thought to be stabilising, while tailwinds from rising Industrial market rents are expected to take some time to cycle through REIT portfolios.

From among the larger caps, Credit Suisse prefers Charter Hall Retail REIT ((CQR)) in Retail, Goodman Group ((GMG)) when choosing from Fund Managers, and Mirvac Group ((MGR)) in the Diversified space.

Regarding small caps, the analyst also sees value in the RAM Essential Services Property Fund ((REP)).

Outperformers for the month included Charter Hall Group ((CHC)) which gained 8.1%, HealthCo Healthcare & Wellness REIT ((HCW)) 4.4%, Scentre Group ((SCG)) 4%, Waypoint REIT ((WPR)) 1.2% and Centuria Industrial REIT ((CIP)) which gained 1%.

Underperformers included Centuria Office REIT ((COF)) which lost -11.6%, Arena REIT ((ARF)) -11.6%, Centuria Capital Group ((CNI)) -11.4%, Ingenia Communities Group ((INA)) -8.3% and Shopping Centres Australasia Property Group ((SCP)) which lost -8.1%.

Interest rates

In the US, the 10-year treasury yield rose by 52bps to 3.13%, driven by hawkish comments by the Federal Reserve, which heightened expectations for the severity of future rate hikes, according to UBS.

Meanwhile, in Australia the 10-year bond yield rose by 54bpts to 3.60%, and the Reserve Bank raised the cash rate by 50bps to 1.85% (and is widely expected to do so again later today).

Commodities

The CRB Commodity Index fell by -0.6% to 290 in August.

Brent crude oil fell by -12.3% to US$96.5/bbl after a de-escalation in Iraq stabilised oil exports, explains UBS.

The iron ore price fell by -16.2% to $US98/t.

The gold price decreased by -3.1% to US$1,711/oz, amid US dollar strength and higher real rates.

Hard coking coal prices jumped by 49%, while thermal coal rose by 4.9% during August.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, rose by 2.6% to 108.70.

The Australian dollar closed out August at US68.53cents, falling by -1.8% from the end of July. 

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