November In Review: Equities Up As Bond Yields Slide

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

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 %)

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 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

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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