June In Review: Strong Finish For Outsized FY23

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The ASX200 added 1.8% in June for an above-average total gain of 14.8% in FY23, though foreign peers did even better.

-The ASX200 gained 1.8% (total return) in June
-Materials and Financials gained, Health underperformed
-Yield on Australian ten-year bonds rose by 42bps
-Information Technology, Material and Utilities led in FY23
-Globally, Growth outperformed Value in past 12 months

By Mark Woodruff

The ASX200 gained 1.8% (including dividends) in June, and 14.8% over FY23, the seventh largest total return since 1980. It proved a year of two different halves with most gains achieved in 2022 and towards the end of the period.

The FY23 return compares to total returns for the MSCI World Developed Markets and the S&P500 Index in the US of 18.9% and 19.6%, respectively, in local currency terms.

Financials and Materials contributed the most to the local gains achieved, while rising real yields were a valuation headwind for high PE stocks in the Healthcare sector, explains Macquarie. With banks underperforming, this serves as a reminder to investors the financials sector also includes insurance, insurance brokers, wealth managers and other diversifieds.

In June, UBS notes investors seemingly shrugged off recession fears amid a local retail spending rebound and softening rate hike expectations.

Australian 10-year bond yields rose by 42bps to 4.02%, as the RBA surprised the market with a 25bps cash rate rise in early-June to 4.10%. 

Prior to yesterday’s news of an unchanged cash rate in July, Macquarie stated the RBA had already hiked enough to slow inflation and felt there was an increasing risk of a policy mistake given the lagged effect of rate rises on the growth cycle.

Morgan Stanley was surprised by the July pause, but now expects data will support two further hikes in August and September to reach a 4.6% terminal rate.

US yields also rose by 18bps to 3.81% on anticipation of further tightening by the Federal Reserve. Jerome Powell and Co have indicated more tightening is likely.

The ASX200 underperformed in June versus the MSCI Developed Markets Index which gained 5.7%, while the S&P500 in the US gained 6.6% in local currency terms. 

The only sectors to decline on the ASX were Healthcare and Communication Services which lost -6.6% and -1%, respectively, while Materials and Financials contributed the most to overall performance. The Technology sector also performed strongly.

A rare profit warning from CSL ((CSL)), and the subsequent punishment for the shares, proved too much for the local healthcare sector to absorb.

Materials was the best performing sector in June with a gain of 4.8%, while Information Technology is up 30.9% year-to-date.

The best performing segment was large cap Resources. With the exception of the small cap universe, Resources broadly outperformed Industrials across size/macro indices.

Australian large caps gained 1.8% in June, ending the first half of 2023 with a gain of 4.5%, while small caps lagged significantly, notes S&P Global. The Small Ordinaries ended flat in June and only registered a gain of 1.3% so far this year.

According to S&P Global, the segment of 'Dividend Opportunities' performed the best for the month, gaining 4%, while Quality is leading for 2023 with a gain of 7.9%.

On a global basis, Value has now surrendered leadership to Growth over a rolling 12-month period, though Value in Australia outperformed Growth in June by 2.8 percentage points, partly due to the aforementioned underperformance by CSL, explains Macquarie.

Regarding individual stocks in June, BHP Group ((BHP)) added the most to the ASX200 monthly performance followed by CommBank ((CBA)) and Fortescue Metals ((FMG)); the majority of index downside was driven by CSL.

A 4.6% gain for the Materials sector included outperformers across iron ore, steel, coal and lithium via Fortescue, BlueScope Steel ((BSL)), and Whitehaven Coal ((WHC)). Lithium also chipped in with returns for Pilbara Minerals ((PLS)) and Allkem ((AKE)) of 9.4% and 7.5%, respectively.

Due to higher real yields, explains Macquarie, gold stocks were the key underperformer in the Materials sector.

The CRB Commodity Index rose by 3.2% to 262 in June, with the price of iron ore up by 13.4% to US$114/t, UBS ascribing the increase to demand growing slightly more than supply and falling inventories.

Brent Oil rose by US$2.24 to US$74.90/bbl, trading on tighter market fundamentals, notes UBS, coupled with political uncertainty in Russia.

Gold prices fell by -US$52.15 to US$1,912/oz as the Federal Reserve and the ECB continue to target inflation.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, decreased by -1.4% to 102.9, while the Australian dollar moved higher by 2.5% to US$0.6651.

Morgan Stanley points out forecasts for corporate earnings in Australia continued to be revised lower through June and the broker’s modeling suggest an Industrial-led downdraft in consensus forecasts seems imminent.

Ord Minnett agrees Australia's earnings outlook is challenging; the broker is cautious on the approaching financial year.

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 index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

The Year That Was: FY23

The outperforming sectors over FY23 were Information Technology followed by Materials, Utilities and Energy. The laggards were Healthcare, Consumer Staples and Real Estate. 

A 23.2% return for Resources happened largely due to the China re-opening and stimulus, explains Macquarie, while the total return for Industrials was 11.8%.

This broker also highlights a strong performance by the insurance sector over the financial year, which is consistent with outperformance in periods when bond yields are rising.

Mid caps were the top performing size for the financial year, providing a total return of 18%, while small caps lagged with an 8.5% return.

The largest individual contributors for FY23 were BHP Group, CommBank and Woodside Energy ((WDS)). The latter's inclusion also serves as a reminder that most of the financial year's gains were made in the final quarter of 2022. Woodside shares are pretty much unchanged over the past six months.

Australian banks

The average total shareholder return for the major banks in June was 2.9%, outperforming the 1.8% gain for the ASX200, while the smaller banks all underperformed.

In descending order of returns: CommBank ((CBA)) gained 3.6%, ANZ Bank ((ANZ)) 3.4%, Westpac ((WBC)) 3.2%, Judo Capital ((JDO)) 1.7%, National Australia Bank ((NAB)) 1.5%, Bank of Queensland ((BOQ)) 0.4% while Bendigo & Adelaide Bank ((BEN)) achieved a flat return for the month.

Morgan Stanley points out all the major banks have underperformed the ASX200 thus far in 2023, with ANZ the best and NAB the worst, returning 3.7% and -9.5%, respectively. In between, CommBank and Westpac returned -0.2% and -5.6%, respectively.

For the year-to-June, NAB, Bendigo & Adelaide Bank, Bank of Queensland and Judo have all underperformed the ASX200 by more than -10%, while ANZ, CommBank and Westpac performed broadly in line with the market.

The majors are considered 'cheap' relative to the ASX Industrials ex banks when compared to average relative valuations since 2010, but they remain 'expensive' relative to bonds over the same time period, explains Morgan Stanley.

REITs

The returns from Australian REITs were flat in June, underperforming the ASX200 by -1.8%, with Industrial, Diversified, Retail and Office REITs returning 2.8%, 0.8%, -1.3% and -1.8%, respectively.

Globally, REITs returned 3.4% over the month of June in US dollar terms.

Outperformers for the month in Australia included: HMC Capital ((HMC)) which gained 15%, Abacus Property ((ABP)) up 8.3% and Goodman Group ((GMG)) which gained 3%.

Underperformers in June included: Region Group ((RGN)) which lost -6.5%, Charter Hall Long WALE REIT ((CLW)) down -5.3% and Ingenia Communities ((INA)) which lost -5.2%.

For FY23, the top-performing REITs have been Mirvac Group ((MGR)) and Stockland ((SGP) with gains of 19.9% and 19.4%, respectively, while the worst performances have come from Cromwell Property ((CMW)) and Region Group with losses of -22.4% and -12.3%, respectively.

The rally by both Mirvac and Stockland was evidence of residential and logistics being the top performing theme, explains UBS, with Centuria Industrial REIT ((CIP)), Lifestyle Communities ((LIC)) and HMC Capital also gaining 16%, 16% and 15%, respectively.

UBS notes investor caution over the outlook for Office was shown by the losses experienced by Dexus ((DXS)) -6%, Centuria Office REIT ((COF)) -11%, Region Group -12.3%, Lendlease Group ((LLC)) -13% and Rural Funds ((RFF)) -26%.

In casting an eye over FY24, UBS still sees Logistics as the preferred real estate asset class due to favourable structural dynamics, followed by Manufactured Home Estate (MHE) and Non-Discretionary Retail.

UBS analysts also prefer REITs with business models resilient to higher interest rates (Goodman Group) or the likes of Centuria Industrial REIT, HomeCo Daily Needs REIT ((HDN)) or Charter Hall Retail REIT ((CQR)), which have resilient income streams.

Additionally, UBS likes the affordable housing product theme encapsulated by both Mirvac Group and Lifestyle Communities.

New Zealand

The NZX50 Portfolio in New Zealand lagged Australia in June with a 0.9% return.

For the first half of 2023, the Index gained around 4% and performed broadly in line with the ASX200, equally lagging stronger performances by US indices.

Driven by the global tech rally, suggests Macquarie, Technology was the best performed sector in gaining 17%, while Staples was the worst sector losing -7% largely due to a decline in a2 Milk Co, which is also listed in Australia under the code ((A2M)).

While the company gained Chinese State Administration for Market Renewal (SAMR) re-registration, the broker felt this was widely expected.

Also, Australian-listed Vista International ((VGL)) and Serko ((SKO)) were instrumental in the gains for Technology with returns of 30% and 23%, respectively.

Small caps underperformed with the NZX SmallCap index losing -1.1% in June, though it has advanced 2.9% so far in 2023. Value stocks outperformed the NZX50 by the largest margin (3.4%) in June.

Jarden is surprised its underweight position for Auckland International Airport ((AIA)) in its Model Portfolio didn’t yield more benefit to the overall performance in June.

This broker cites negatives including the likelihood of lower PSE4 (disclosure) returns than management was expecting, and a potential equity raise to fund a strong capex program.

In addition, Auckland Council approved the partial sell-down of around -7% of its current circa 18% stake.

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