October In Review: Material Losses Across All Sized Indices

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The ASX200 lost -3.8% in October with mid cap and small cap indices faring worse as 10-year bond yields climbed, while the gold price spiked.

-The ASX200 lost -3.8% (total return) in October
-IT and Healthcare slumped, Utilities and Materials fared best
-Mid cap and small cap indices lost -6.9% and -5.5%, respectively
-Bond yields jumped and the gold price rose

By Mark Woodruff

In a weak October for equities globally, the ASX200 lost -3.8% (net of dividends) and traded near 52-week lows, underperforming both the MSCI Developed Markets Index and the S&P500 in the US, which fell by -2.6% and -2.1%, respectively, in local currency terms.

Australian 10-year bond yields rose by 44bps to 4.92%, amid expectations for higher rates for a longer period to combat persistent inflation, which has now remained above the Reserve Bank’s target for a record ten quarters, points out UBS.

US yields also rose by 33bps to 4.90% as supply concerns weighed on the market, according to the broker, and as the market anticipated the Federal Reserve would continue a hawkish tone (a view which has softened post month-end).

IT and Healthcare were the two worst performing sectors over the month, losing -7.6% and -6.4%, respectively. At least part of the de-rate for Healthcare was due to ongoing concerns around increased competition from weight loss drugs, explains Macquarie, with shares of ResMed ((RMD)) and CSL ((CSL)) falling by -7.7% and -7.4%, respectively.

Morgan Stanley notes meaningful pullbacks across the Industrials, Real Estate and Energy sectors, with the latter reversing September’s strength due to a softer oil price. Financials were the largest detractor of overall performance for the month, highlights the broker.

Utilities gained 1.7% and Materials lost only -0.8% in October. Large-to-mid-cap resources added the most gains, explains Morgan Stanley, with Fortescue Metals ((FMG)) the largest stock contributor, followed by Northern Star Resources ((NST)), Rio Tinto ((RIO)) and BHP Group ((BHP)).

The Small Ordinaries Index posted a loss of -5.5% for the month, with Financials, Discretionary and Healthcare detracting the most, while the Materials sector was the largest positive contributor. The MidCap50 fared even worse by losing -6.9%.

While still trailing Growth year-to-date, Value outperformed by 2.3 percentage points (ppts) over October, as the rise in real yields weighed on stocks with high price earnings ratios, notes Macquarie.

Over a three-year period in Australia, Value has outperformed Growth by 14ppts per year, compared to the lesser 2ppts per year in the US due to the strong share prices for the “Magnificent 7” technology stocks.

Commodity prices were mixed over October with the CRB Index falling by -1.2% to 281.

Brent crude oil fell by -US$7.86 to US$87.45/bbl on macroeconomic growth concerns, according to UBS, which offset geopolitical news coming out of the Middle East.

Iron ore prices rose by US$2.50 to US$122/t, though the broker cautions rebar prices and spreads are still depressed, and steel net exports remain elevated, which suggests China's steel demand is soft.

UBS attributes short-covering and safe haven demand for lifting the gold price by US$127.10 to US$1,998. A 9% rally from monthly lows suggests to the broker investors are favouring gold versus the other traditional safe haven assets, perhaps because idiosyncratic factors are weighing on alternatives such a US treasuries, the US dollar and the Japanese yen.

The rise for gold was even more notable, believes Macquarie, given the rise in real yields, which normally causes gold stocks to underperform.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, increased by 0.5% to 106.66, while the Australian dollar declined by -1.5% to US$0.6334.

Based on recent inflation data, Macquarie is forecasting the Reserve Bank will raise rates by a further 25bps to 4.35% in November, while the futures market is pointing to an even chance for a further hike in December.

Regarding equities, Morgan Stanley anticipates building headwinds into Christmas for cash rate-sensitive sectors, which supports the broker’s positioning bias to remain underweight Banks, Consumer, REITs and Housing-linked sectors.

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 average major bank total shareholder return of -3.3% in October slightly outperformed the -3.8% loss for the ASX200.

Westpac ((WBC)) was the best performer in losing -2.6%, followed by CommBank ((CBA)), National Australia Bank ((NAB)) and ANZ Bank ((ANZ)) with losses of -3.4%, -3.5% and -3.7%, respectively.

For the smaller banks, Bendigo & Adelaide Bank ((BEN)) outperformed with a loss of -2.6%, while Bank of Queensland ((BOQ)) and Judo Capital ((JDO)) suffered losses of -7.6% and -15.5%, respectively.

Relative to the ASX Industrials ex Banks, the major banks are cheap compared to their average since 2010, but relative to bonds, they are expensive versus the average since 2010, explains Morgan Stanley.

Australian Financial Ex-Banks

Stocks within the Financial EX-Banks sector mostly underperformed the ASX200 in October.

Tailwinds from both pricing and weather aided overall outperformance by the Insurance sector, explains Morgan Stanley.

Asset Managers underperformed on ongoing outflows and strategic uncertainty, suggests the broker, with losses for Magellan Financial Group ((MFG)) and Platinum Asset Management ((PTM)) of -29% and -13%, respectively.

The Wealth Managers also had a bad month, with AMP ((AMP)) and Insignia Financial ((IFL)) losing -16% and -14%, respectively, after releasing September quarter updates short of consensus expectations.

Australian REITs

The ASX200 Property Accumulation Index lost -5.8% in October, underperforming the ASX200 which lost -3.8%.

This monthly performance in Australia was very similar to the -5.9% loss globally for REITs, in US dollar terms.

Retail and Industrial REITS were the strongest performers relatively speaking in October, notes UBS, by only losing -2.2% and -3.4%, respectively.

Outperformers for the month in Australia were Vicinity Centres ((VCX)) with a gain of 0.3%, along with Scentre Group ((SCG)) and Region Group ((RGN)) which lost -1.2% and -2.7%, respectively.

Underperformers included Centuria Capital Group ((CNI)), Mirvac Group ((MGR)) and Cromwell Property Group ((CMW)) which lost -15.8%, -14.6% and -13.5%, respectively.

Over the last 12-month period, top performers have been Goodman Group ((GMG)) and Stockland Group ((SGP)) with gains of 24% and 5.1%, respectively, and the worst performers were Cromwell Property Group and Growthpoint properties Australia ((GOZ)) with losses of -49.9% and -36.2%, respectively.

The sector in Australia is currently trading on a -18.5% discount to blended valuation price targets used by UBS and is also trading on a FY24 distribution yield of 4.9%.

New Zealand

The NZX50 in New Zealand lost -5.3% in October compared to the -3.8% loss for the ASX200.

Small caps fared relatively better compared to the NZX50 with a -3.3% loss for the NZX Emerging Opportunities Index.

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