January In Review: Large Caps Back In The Lead

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The ASX200 gained 1.2% in January on expectations for falling interest rates, with energy and financial stocks grabbing the lead.

-The ASX200 gained 1.2% (total return) in January
-Energy and Financials gained, while Materials and Utilities lagged
-Growth outperformed Value, large caps fared best
-Morgan Stanley believes stock-specific risk is high on the ASX

By Mark Woodruff

After a 1.2% gain in January (including dividends), the ASX200 has now gained 14% from lows reached last October and set a new all-time high. The index was boosted by slowing inflation data and expectations for monetary policy easing by the Reserve Bank locally, and by the Federal Reserve in the USA.

In a broad measure of global equity market performance for January, the MSCI All Country World Index (ACWI) rose by 1.3%. The S&P500 in the US gained 1.68%.

Japan's stock market was the best performer globally over the month with a gain of 7.2%, bringing the total gain over the last year to 17.5%. As the Chinese economy continues to struggle to regain sustainable positive momentum, the Chinese equity market crowned itself the worst performer at the start of the fresh calendar year.

Australian 10-year bond yields rose by 6bps over January and the US 10-year treasury yield lifted by 7bps.

Most sectors in the ASX200 participated in the January rally, led by strong gains in Energy, Financials and Healthcare, though Materials and Utilities lost ground.

The 4.9% gain for Financials was aided by a 5.9% gain for the Insurance sector, which Macquarie attributes to mean-reversion as the sector performed poorly in late-2023 when lower bond yields drove some rotation out of the sector. There were greater than 5% gains for nib Holdings ((NHF)), Medibank Private ((MPL)), QBE Insurance ((QBE)) and Insuranse Australia Group ((IAG)).

Growth only just edged out Value, in Australia, while the relative return for Growth was stronger in the US, due to outperformance by large cap growth companies, explains Macquarie.

Despite hope small caps would start to generate better returns, large caps in Australia and the US outperformed in January, continuing the trend that dominated in 2023.

The Small Ordinaries Index in Australia gained 0.9% in January, led by strong returns within Energy, Staples and Financials, with the Materials sector a drag on overall performance, notes Morgan Stanley.

The CRB Index rose by 3.3% to 272 over January, with Brent crude oil rising by 6.1% to US$81.7/bbl, while the iron ore price fell by -6.7% to US$132.50/t.

The Materials sector suffered from weak sentiment around the Chinese economy and a strong US dollar, explains Macquarie. The iron ore price fall also contributed to the January underperformance.

Morgan Stanley points out half of the losses incurred in the Materials sector were courtesy of BHP Group’s ((BHP)) share price fall, with Newmont Corp ((NEM)) and Arcadian Lithium ((LTM)) other notable detractors to performance as both gold producers and lithium companies generally remain in struggle street.

The price of gold fell by -1.5% in January to around US$2039.5/oz.

The US dollar Index (DXY), a measure of the value of the US dollar relative to a basket of foreign currencies, increased by 1.9% to 103.97. The Australian dollar fell by -3.1% to US$0.6520.

As the rally on the ASX has lifted many boats, Morgan Stanley believes stock-specific risk is high. While a base is being formed for earnings, it has arguably not yet been found, in this broker’s view.

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 5.5% in January outperformed the 1.2% return from the ASX200.

National Australia Bank was the best performed major, gaining 6.2%, followed by Westpac Bank ((WBC)), CommBank ((CBA)) and ANZ Bank ((ANZ)) with gains of 5.6%, 5.1% and 4.9%, respectively.

Among the smaller banks, the Judo Capital ((JDO)) share price leapt by 18% following a better-than-expected first half trading update, and management’s first time FY24 and FY25 guidance, explains Morgan Stanley. 

Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) gained 1.8% and 0.7%, respectively, over January.

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

New Zealand

The NZX50 in New Zealand rose by 1%, below the 1.2% gain for the ASX200.

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