July In Review: Energy And Banks Drive Gains

This story features WOODSIDE ENERGY GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WDS

The ASX200 gained 2.9% in July led by energy and banking stocks and performed broadly in line with overseas indices.

-The ASX200 gained 2.9% (total return) in July
-Energy and Financials gained, Health again underperformed
-Value outperformed Growth, Banks rallied strongly
-The CRB Commodity Index increased by 7.7%

By Mark Woodruff

The ASX200 gained 2.9% (including dividends) in July following softer-than-expected inflation readings in Australia and the US, which reduced the risk of further rate hikes.

Apart from Healthcare and Consumer Staples, all sectors closed higher in July.

As inflation is slowing without any rise in unemployment, investors are more hopeful of a soft landing, which Macquarie notes supported the outperformance of cyclicals over July.

The MSCI Developed Markets Index gained 2.9% over July, while the S&P500 gained 3.2% in local currency terms.

Australian 10-year bond yields traded relatively unchanged at 4.05% as the RBA's July meeting saw the cash rate paused at 4.10% (as occurred again in August), while US 10-year yields rose by 14bps to 3.95%, as the Federal Reserve increased its cash rate by another 25bps to 5.5% and continued its hawkish tone.

Energy and Financials were the top two performing sectors for the month, gaining 8.4% and 4.9%, respectively, as well as adding the most value to the broader market total returns.

Energy was supported by stronger oil and thermal coal prices, while gas was a laggard among energy commodities, notes Macquarie. Woodside Energy ((WDS)) was the best-performing large-cap energy stock in July, while Beach Energy ((BPT)) outperformed the Small Ordinaries.

The strong rise for Financials was largely driven by Banks (6.5% gain) as reduced rate hike expectations lowers the risk of policy being overtightened and associated loan losses, explains Macquarie.

At a stock level, Virgin Money UK ((VUK)) gained 20.7%, while domestically focused Bank of Queensland ((BOQ)), ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) gained 10%, 8.6% and 7.8%, respectively.

The Healthcare sector lost -1.5% in July and was the biggest underperformer for the second month in a row. CSL ((CSL)) lost -3.2% and continues to be the key drag on the health index since issuing disappointing FY24 guidance in June. The Consumer Staples sector also lost -1.14%.

Value backed up June's relative outperformance compared to Growth, given the gains by key Value sectors in Energy and Banks.

Across size-biased indices, mid-caps were preferred over small and large for the month, led by Industrials.

Investors are beginning to see value in small caps, according to Macquarie, with the Small Ordinaries Index gaining 3.5% in July, its best monthly return since January. 

Small caps outperformed large caps by one percentage point (ppt) in July following a -12ppt underperformance over the last year.

Commodity prices largely rose over July and the CRB Commodity Index increased by 7.7% to 282.2.

Brent Oil jumped by 14.2% to US$85.60/bbl, due to tighter market fundamentals and improved US macroeconomic data, explains UBS.

The US Department of Commerce released its economic growth data this week showing a stronger-than-expected second quarter at 2.4%, which in part defies recession risks, notes the broker.

Iron Ore prices fell by -5.39% to US$107.77, while gold prices rose by 2.69% to US$1959.40. The yellow metal is currently on a three-week winning streak, with further gains over the coming fortnight anticipated by the predictive models used by UBS.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, decreased by -1.03% to 101.85, while the Australian dollar moved higher by 0.8% to US$0.6703.

EPS expectations continued to fall in July, and Macquarie expects conservative initial guidance over the August reporting season given current macroeconomic uncertainties.

Meanwhile, around 30% of companies on the ASX are trading within 5% of 52-week highs compared to 20% in June.

The market is experiencing the kind of price/earnings expansion normally associated with investors anticipating an easing of policy, yet, in the absence of higher unemployment, Macquarie expects inflation will remain at a level that constrains RBA easing.

Morgan Stanley shares Macquarie’s concerns around equities. 

Valuations have now pushed above average levels while earnings momentum is lagging.

Earnings results have commenced, with 70-75% of companies by number and total market cap reporting over a busy August 14-25 period.

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

Australian Banks

The major banks outperformed the 2.9% gain for the ASX200 in July with a total shareholder return of 6.6% as price earnings multiples re-rated following the RBA's decision to hold the cash rate steady.

ANZ, NAB, CommBank ((CBA)) and Westpac ((WBC)) gained 8.6%, 7.8%, 5.4% and 4.7%, respectively.

Smaller banks did even better with Judo Capital ((JDO)), Bank of Queensland and Bendigo & Adelaide Bank ((BEN)) registering gains of 15.2%, 10% and 8.8%, respectively.

As was the case at the end of June, Morgan Stanley considers the majors are '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.

Australian Financials Ex-Banks

Individual shares within the Financials Ex-Banks sector had a mixed performance relative to the ASX200 gain of 2.9% in July.

There was ongoing outperformance by Suncorp Group ((SUN)) and Insurance Australia Group ((IAG)) with gains of 5% and 4%, respectively, while QBE Insurance ((QBE)) only rose by 1%.

GQG Partners ((GQG)) gained 17% after releasing a strong investment performance as part of its June quarter update and continued its funds flow outperformance relative to domestically listed peers.

Late in July, GQG Partners announced a strategic bid for Pacific Current Group ((PAC)) to counter the bid by Regal Partners ((RPL))/River Capital and preserve its commercial relationship, reported Ord Minnett.

After winning a new superannuation contract, Challenger Group ((CGF)) gained 11%, while Macquarie Group ((MQG)) lost -1% due to soft first quarter commentary and a weak outlook, according to Morgan Stanley.

New Zealand

The NZX50 in New Zealand gained 1.2% in July with Technology and Financials gaining 12% and 6%, respectively, while Discretionary fared worst in losing -3%.

The three-year bond yield rose by 17bps despite the RBNZ holding the official cash rate (OCR) steady at 5.5%, which could signal the end of the 18-month tightening cycle, in Macquarie’s view.

The market is pricing in one further hike this year before rate cuts in 2024.

Regarding individual stocks, Pacific Edge (PEB.NZ), Serko ((SKO)) and Vista International ((VGL)) gained 54%, 7% and 6%, respectively, to help boost the Technology sector.

Shares in cancer diagnostics company Pacific Edge have been volatile over the last eight weeks, points out Macquarie following a decision by Novitas and First Coast to delay the implementation of the Local Coverage Determination (LCD), released in early-June.

The LCD would have seen Medicare coverage of Cxbladder (a test for bladder cancer) cease in the US in mid-July.

KMD Brands ((KMD)) and Tourism Holdings ((THL)) both lost -9% and were the largest NZX50 decliners.

KMD provided a weak trading update and outlook, while downgrades made in May by Tourism Holdings continue to worry the market with some investors expecting further downgrades, according to Macquarie.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms