April In Review: Rate Rise Pause Buoys Equities

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The ASX200 gained 1.8% in April after the Reserve Bank placed interest rate rises on hold, leading to a strong rebound for real estate-linked stocks.

-The ASX200 gained 1.8% (total return) during April 
-All sectors were positive, apart from materials
-Australian bond yields stabilised and real estate gained strongly
-Growth surpassed Value, while the Small Ordinaries outperformed
-Brokers are cautious on equities after the April rally
 

By Mark Woodruff

The ASX200 gained 1.8% (including dividends) in April as sentiment rebounded after a pause in monetary tightening, following ten monthly increases in a row by the Reserve Bank of Australia.

Share valuations were supported in the absence of earnings upgrades, and a rise in Sydney house prices along with improved auction clearance rates boosted the market outlook for Australian housing-linked stocks, explains Morgan Stanley.

The ASX200 just slightly shaded the MSCI Developed Markets Index and the S&P500 in the US, which gained 1.7% and 1.6%, respectively, in local currency terms.

Australian 10-year bond yields were relatively unchanged compared to previous months, rising by 4bps to 3.34%. US 10-year yields fell by -5bps to 3.45% on expectations of a pause to the Federal Reserve’s aggressive rate hike path due to economic uncertainty, explains UBS.

On Tuesday, the RBA lifted its finger off the pause button and increased the cash rate by 25bps to 3.85%, as inflation remains too high.

In April all sectors on the ASX were positive except Materials, which lost -2.6%. Financials were the largest contributor to total returns, followed by Healthcare, Real Estate and Industrials.

Strong gains for Real Estate followed a weak March, explains Macquarie, when sector returns lagged the wider market due to US banking issues, while tight credit also amplified concerns over commercial property.

In percentage terms, REITs outperformed in April with a gain of 5.3%, while Information Technology and Industrials gained 4.8% and 4.4%, respectively. The worst relative performers were Materials, followed by Utilities and Energy with gains of 1.4% and 1.7%.

At the stock level, CSL ((CSL)), ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) had the greatest positive impact on the index performance, whereas value was lost via iron ore-linked names BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)), notes Morgan Stanley.

The decline in the Materials sector was partly driven by China growth concerns, suggests Macquarie, which saw China equities fall by -5% and metals like iron ore (with a greater China focus) falling materially in price.

Generally speaking, quarterly updates from the sector were seen as disappointing, with Mineral Resources ((MIN)) the largest underperformer in the ASX100, losing around -9%.

Gold stocks continued their good run and have climbed by 54% in the last six months, more than doubling the 23% rise by the next closest industry group, Utilities.

Macquarie attributes this gain to a likely underweight positioning at the start of the six month period on top of a decline in the US Dollar Index, as well as a decline in real yields as markets price in expectations of central bank easing.

The Small Ordinaries Index gained 2.78% in April. All sectors had a positive impact on performance on a return and contribution basis. Consumer Discretionary, Real Estate and Financials added the most value for the month, while Consumer Staples contributed the least.

Commodity prices experienced mixed trends over the month, with the CRB Commodity Index rising by 0.2% to 268. Brent oil fell as fears of global recession continue to drive prices lower, while iron ore prices fell by around -8% on lagging steel demand from China, explains UBS. Gold prices remained relatively flat over the month.

Growth outperformed Value in April by 3.3 percentage points, largely driven by poor returns for mining stocks, notes Macquarie.

This broker suggests recent intra-market movements both in Australia and in the US are not suggestive of a traditional new bull market. A US recession later in 2023 is still anticipated.

Over the last six months in the US, it’s felt the outperformance of Growth over Value by 12 percentage points reflects a market looking for more earnings certainty. Also, large caps and defensives in the US have outperformed over the last month.

In a statement made prior to Tuesday's rate rise in Australia, Morgan Stanley anticipated weaker earnings ahead for the ASX200 and advised investors not to chase the recent rally in cash-rate sensitive sectors.

The activity cycle for housing is flying into an air pocket, and to suggest that adjacent retail categories can rebound, when the consumer has only just got started adjusting their wallet, appears hopeful rather than logical to the broker.

April In Review continues below the graphics and tables below.

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All calculations in the table below are ex-dividends.

Australia & NZ

Metals & Minerals

Energy

Australian Financials Ex-Banks

Financials Ex-Banks largely outperformed the ASX200 during April.

Perpetual ((PPT)) gained 14% after reporting better-than-expected flows and synergies in its March quarter trading update, explains Morgan Stanley.

On the other hand, Platinum Asset Management ((PTM)), Janus Henderson ((JHG)) and Magellan Financial ((MFG)) which returned 1%, -1% and -5%, respectively, are yet to stabilise outflows, on the broker’s observation.

The analysts also highlight a 12% gain for Latitude Group ((LFS)) after the appointment of a new CEO, and following restoration of most systems following the much publicised cyber-attack.

REITs

The REIT sector outperformed the 1.8% gain by the ASX200 in April, delivering a total return of 5.29%, though is still underperforming the ASX200 by -12.7% on a rolling 12-month basis.

Outperformers for April include fund managers Charter Hall ((CHC)) and HMC Capital ((HMC)), as well as residential-linked exposures such as Mirvac Group ((MGR)) and Stockland ((SGP)).

Credit Suisse suggests current challenges in the residential market are more cyclical than structural, and investors feel Mirvac and Stockland will benefit from increasing demand for dwellings from population growth (including higher migration), as rental markets remain tight, and the worst of the rate hiking cycle appears over.

Underperformers during the month included healthcare-exposed names HealthCo Healthcare & Wellness REIT ((HCW)) and RAM Essential Services Property Fund ((REP)), as well as alternative sector exposures National Storage REIT ((NSR)) and Rural Funds ((RFF)).

From among the large cap diversified names, Credit Suisse continues to prefer Stockland. While there’s value seen in fund manager Charter Hall, it’s felt Goodman Group ((GMG)) will garner greater support in the short-term.

In Retail, Credit Suisse only just prefers Scentre Group ((SCG)) over Vicinity Centres ((VCX)), yet thinks neighbourhood retail exposures like Region Group ((RGN)) and Charter Hall Retail REIT ((CQR)) provide better relative value.

The broker awaits greater investor comfort around asset valuations for Office-exposed names, despite the current deep value on offer on a discount to book value basis.

Foreign exchange

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, decreased by -0.8% to 101.66.

The Australian dollar moved lower by -1.0% to US$0.6615.

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