November In Review: Equities Up As Bond Yields Slide

Australia | Dec 06 2023

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The ASX200 gained 5% in November on hopes for an end to interest rate rises, with growth stocks and small caps outperforming.

-The ASX200 gained 5% (total return) in November
-Healthcare & Real Estate gained, while Energy lagged
-Growth outperformed Value, small caps fared best
-Global debate centres on the outlook for interest rates and economic growth

By Mark Woodruff

In the largest monthly increase since January this year, the ASX200 gained 5% (including dividends) in November due to lower inflation expectations, and growing optimism central banks in the US and Australia may have completed lifting interest rates.

The S&P500 in the US and the MSCI Developed Market Index gained 9.1% and 8.3%, respectively.

Following a four-month pause, the Reserve Bank increased the cash rate by 25 basis points (bps) to 4.35% in early-November.

Australian 10-year bond yields fell by -52bps over November, notes Macquarie, on softer monthly inflation data.

Current market pricing implies the tightening cycle has come to an end, explains Morgan Stanley, even though some economists are still forecasting one more 25bp hike in February.

Investors in the US are equally looking forward to the end of Fed rate hikes and the prospect for interest rate cuts. Having peaked around 5% in mid-October, the US 10-year bond yield has fallen by -63bps, including a -54bps drop in November.

On the stock market in Australia, Growth outperformed Value by 3 percentage points in November, with the fall in bond yields providing a valuation tailwind for growth stocks, explains Macquarie. This outcome compares to a 4.2 percentage point outperformance by Growth in the US.

Morgan Stanley observes the breadth of sector and stock outperformance in Australia was broad-based, led by the Healthcare and Real Estate sectors, which gained 11.7% and 10.8%, respectively.

The Healthcare sector was supported both by the fall in bond yields and reduced concerns around the impact of weight loss drugs, suggests Macquarie, which have weighed on performances for the likes of ResMed ((RMD)), Fisher & Paykel Healthcare ((FPH)) and CSL ((CSL)) over previous months.

Shares of Fisher & Paykel Healthcare gained 15.7% while CSL, Cochlear ((COH)) and ResMed gained 13.7%, 12.8% and 11.9%, respectively.

The fall in bond yields drove a relief rally for the Real Estate sector, suggests Macquarie. Larger cap stocks such as Charter Hall ((CHC)), Stockland ((SGP)), GPT Group ((GPT)) and Mirvac Group ((MGR)) gained 20.1%, 18%, 15.4% and 12.3%, respectively.

Smaller REITs also experienced strong gains, with Cromwell Property ((CMW)) and Centuria Office REIT ((CNI)) gaining 37.5% and 25.8%, respectively.

The Energy sector lost -7.4% on further oil price retracement, explains the broker, while Utilities lost -6%, weighed down by lower returns from Origin Energy ((ORG)) and AGL Energy ((AGL)).

Small caps outperformed both mid caps and large caps, while Industrials were preferred over Resources across all size-based indices.

The Small Ordinaries Index gained 7% (total return) for the month. All sectors apart from Energy closed higher for the month, led by Healthcare and Technology, while Materials and Real Estate added the most value.

Commodity prices were mixed over November with the CRB Index falling by -2.7% to 274. Brent crude oil fell by -5.2% to US$82.80/bbl. Iron ore prices rose by 7.8% to US$132/t on robust crude steel production in China, according to UBS.

The gold price also advanced by 2.6% to US$2,036/oz as the focus returned to macroeconomic factors, with geopolitical risks easing but the US dollar weakening and US bond yields falling.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, decreased by -3% to 103.50.

The Australian dollar rose by 4.2% to US$0.6602 on expectations of a dovish US Federal Reserve compared to a still "sticky" rates picture for Australia, suggests UBS.

The Outlook

Based on recent economic data in the US, Wilsons believes the odds are still tilted towards a soft landing as inflationary pressures are abating, though tight labour market conditions are showing signs of moderation. 

As long as the US economy can stay on this path of decelerating inflation while avoiding a recession, the outlook should be positive for US equities and fixed income, in the broker’s view.

Market sentiment has been buoyed in past months, driven by resilient US consumption, marginally more positive Chinese activity data, and glimpses of optimism in the latest sentiment surveys across Europe, explains the broker.

However, the risk of recession appears higher in 2024 than in 2023, and Wilsons maintains a watching brief on the labour market and consumer stress for signs of cracks in the soft-landing scenario.

A larger-than-expected slowdown in the US economy is arguably the greatest risk for 2024, suggests the broker.

By contrast to recent global trends of deceleration in inflation, Wilsons feels Australia is set for an extended period of “on-hold” interest rates through 2024. A combination of factors in Australia are noted including a declining growth rate, buoyed by very high immigration rates, alongside easing but relatively sticky inflation, and an ongoing tight labour market.

Morgans concedes 2024 forecasting for Australia is difficult, given a rapidly evolving investment landscape and a year of likely political uncertainty.

Economic growth will contract in the first half of 2024 (mild recession), according to this broker, before returning to growth later in the year, with sticky inflation keeping interest rates higher for longer.

Under this scenario, equities will likely remain rangebound, in Morgans view, until there is more certainty on the interest rate trajectory either peaking or falling. On this greater certainty, this broker is attracted to the risk/reward profile of small and mid-cap stocks, which have de-rated over 2022 and 2023.

Morgans suggests a mild recession would be positive for property because a small amount of inflation is positive for real estate. Also, REIT prices have declined materially, which could lead to opportunities in areas that investors have overlooked in 2023 such as retail/commercial REITs.

Even with the strong November performance, the ASX200 at 7,087 still sits -6% below rolling 12-month levels, points out Morgan Stanley.

While noting December is historically a positive month on the ASX, Macquarie believes investors should not expect the same gains as occurred in November.

UBS recommends investors adopt defensive positioning in equity markets. Stocks with non-cyclical growth avenues and/or income streams which are tied to inflation are preferred.

This broker previously has a year-end target of 7,250 for the ASX200 and now extends the timeframe to mid-2024. The ASX200 closed yesterday at 7,062.

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

Company Change Company Change
SQ2 – BLOCK INC 58.77 LTR – LIONTOWN RESOURCES LIMITED -14.60
JHX – JAMES HARDIE INDUSTRIES PLC 24.64 TWE – TREASURY WINE ESTATES LIMITED -12.44
CHC – CHARTER HALL GROUP 19.95 AGL – AGL ENERGY LIMITED -12.28
SGP – STOCKLAND 16.67 AMP – AMP LIMITED -10.53
FPH – FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED 16.40 STO – SANTOS LIMITED -9.91

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

Company Change Company Change
SQ2 – BLOCK INC 58.77 CXO – CORE LITHIUM LIMITED -22.22
NEU – NEUREN PHARMACEUTICALS LIMITED 44.59 KAR – KAROON ENERGY LIMITED -20.24
IRE – IRESS LIMITED 40.88 HLS – HEALIUS LIMITED -17.13
CMW – CROMWELL PROPERTY GROUP 37.50 CHN – CHALICE MINING LIMITED -15.08
CNI – CENTURIA CAPITAL GROUP 27.95 LTR – LIONTOWN RESOURCES LIMITED -14.60

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

Company Change Company Change
IMU – IMUGENE LIMITED 155.81 IDX – INTEGRAL DIAGNOSTICS LIMITED -33.52
SQ2 – BLOCK INC 58.77 APX – APPEN LIMITED -30.56
TPW – TEMPLE & WEBSTER GROUP LIMITED 45.26 APM – APM HUMAN SERVICES INTERNATIONAL LIMITED -27.75
NEU – NEUREN PHARMACEUTICALS LIMITED 44.59 CXO – CORE LITHIUM LIMITED -22.22
ZIP – ZIP CO LIMITED 42.11 KAR – KAROON ENERGY LIMITED -20.24

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

Company Change Company Change
4DX – 4DMEDICAL LIMITED 105.38 BTH – BIGTINCAN HOLDINGS LIMITED -34.55
SQ2 – BLOCK INC 58.77 APX – APPEN LIMITED -30.56
BRN – BRAINCHIP HOLDINGS LIMITED 41.94 EML – EML PAYMENTS LIMITED -24.34
IRE – IRESS LIMITED 40.88 PPS – PRAEMIUM LIMITED -24.32
NXL – NUIX LIMITED 28.21 OFX – OFX GROUP LIMITED -6.82

All index data are ex dividends. Commodities are in USD.

Australia & NZ

Index 30 Nov 2023 Month Of Nov Quarter To Date (Oct-Dec) Year To Date (2023)
NZ50 11330.200 5.32% 0.30% -1.25%
All Ordinaries 7297.70 4.74% 0.66% 1.05%
S&P ASX 200 7087.30 4.52% 0.55% 0.69%
S&P ASX 300 7039.00 4.57% 0.57% 0.52%
Communication Services 1483.40 2.80% -0.22% 5.12%
Consumer Discretionary 3048.70 4.68% -0.46% 11.66%
Consumer Staples 11728.10 -0.88% -4.80% -6.49%
Energy 10271.00 -7.41% -12.21% -6.94%
Financials 6325.70 4.12% 0.34% -0.51%
Health Care 38814.70 11.69% 3.63% -6.21%
Industrials 6511.70 6.58% -0.30% 4.44%
Info Technology 1707.10 7.27% -0.84% 21.46%
Materials 17911.10 4.89% 4.02% 2.11%
Real Estate 3044.30 10.79% 4.03% 1.37%
Utilities 8067.00 -6.03% -4.45% -2.95%
A-REITs 1364.60 11.00% 4.53% 2.34%
All Technology Index 2487.60 8.40% 0.82% 24.04%
Banks 2593.90 4.10% 0.48% -1.98%
Gold Index 7291.60 7.15% 16.47% 23.20%
Metals & Mining 5949.80 4.07% 3.75% 0.04%

The World

Index 30 Nov 2023 Month Of Nov Quarter To Date (Oct-Dec) Year To Date (2023)
FTSE100 7453.75 1.80% -2.03% 0.03%
DAX30 16215.43 9.49% 5.39% 16.46%
Hang Seng 17042.88 -0.41% -4.31% -13.84%
Nikkei 225 33486.89 8.52% 5.11% 28.33%
DJIA 35950.89 8.77% 7.29% 8.46%
S&P500 4567.80 8.92% 6.52% 18.97%
Nasdaq Comp 14226.22 10.70% 7.62% 35.92%

Metals & Minerals

Index 30 Nov 2023 Month Of Nov Quarter To Date (Oct-Dec) Year To Date (2023)
Gold (oz) 2042.10 2.34% 9.54% 13.88%
Silver (oz) 24.99 6.84% 10.53% 6.43%
Copper (lb) 3.7809 3.85% 2.39% 0.73%
Aluminium (lb) 0.9857 -0.80% -2.39% -16.07%
Nickel (lb) 7.6076 -7.99% -10.68% -40.54%
Zinc (lb) 1.1384 2.27% -0.97% -16.12%
Uranium (lb) weekly 80.75 9.86% 17.88% 69.64%
Iron Ore (t) 129.67 5.82% 8.84% 17.42%

Energy

Index 30 Nov 2023 Month Of Nov Quarter To Date (Oct-Dec) Year To Date (2023)
West Texas Crude 77.93 -5.57% -15.03% -0.18%
Brent Crude 83.22 -5.21% -12.53% 2.14%

Australian Banks

The average major bank total shareholder return of 5.6% in November outperformed the 5% return from the ASX200.

CommBank ((CBA)) was the best performed major, gaining 8.4%, followed by Westpac Bank ((WBC)), National Australia Bank ((NAB)) and ANZ Bank ((ANZ)) with gains of 7.3%, 4.3% and 2.5%, respectively.

Bank of Queensland ((BOQ)) and Judo Capital ((JDO)) outperformed among the smaller banks, with gains of 7.8% and 5.9%, respectively, while Bendigo & Adelaide Bank ((BEN)) only gained 2.5%.

Relative to the ASX Industrials ex Banks, the major banks are cheap compared to the sector average valuation since 2010, notes Morgan Stanley.

New Zealand

The NZX50 in New Zealand rose by 5%, in line with the gain by the ASX200.

Outperformance by large caps, as indicated by the 6% gain for the NZX20, bucked the global trend.

Technical limitations

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CHARTS

AGL ANZ BEN BOQ CBA CHC CMW CNI COH CSL FPH GPT JDO MGR NAB ORG RMD SGP WBC

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: ANZ - ANZ GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: CMW - CROMWELL PROPERTY GROUP

For more info SHARE ANALYSIS: CNI - CENTURIA CAPITAL GROUP

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: GPT - GPT GROUP

For more info SHARE ANALYSIS: JDO - JUDO CAPITAL HOLDINGS LIMITED

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SGP - STOCKLAND

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION