July In Review: Banks Beat Small Caps

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The ASX200 outperformed overseas indices in July aided by ongoing strength in bank share prices.

-ASX200 gained 4.2% (total return) in July
-Small caps underperformed
-Growth outperformed Value, Resources lag
-Banks account for 40% of the ASX200 rise since October

By Mark Woodruff

July is the best month of the year for ASX returns, and true to form the ASX200 gained 4.2% (including dividends), setting a new high at 8092 and outperforming US equities.

In contrast to the US, where Growth shares (led by the Magnificent Seven) fell and funds were diverted to small caps, Growth outperformed in Australia in July and small caps lagged.

In a broad measure of global equity market performances, the MSCI All Country World Index (ACWI) rose by 1.2% in July. The S&P500 in the US gained 1.22%, while the Nasdaq100 lost -1.6%. In Australia, the All-Technology Index gained 1.3%.

All sectors in Australia reacted positively, following a less-than-expected second quarter CPI print, led by Financials, Consumer Discretionary and the Real Estate sectors, while Utilities, Energy and Materials fell behind.

Industrials were again preferred over Resources in July.

The ASX200 has now climbed by 22.5% from October 2023 lows, highlights Morgan Stanley, with Banks accounting for 40% of that rise.

In terms of index weight, the broker points out Banks now have a 1.1% percentage point lead over Resources, having closed the -7.6% percentage point gap in 2024.

There was broad based strength seen across all sizes of indices in July, though the Small Ordinaries and Emerging Companies (ex-ASX300) trailed large caps by -70bps and-400bps, respectively. Small Caps have greater exposure to Discretionary and Real Estate relative to large cap exposure to Financials, explains Morgan Stanley.

Macquarie attributes the 2.5 percentage point outperformance of Growth over Value in Australia largely to the -1% decline in Resources.

A 12.2% gain for Discretionary Retail was the best sector performance, suggesting to Macquarie investors are positioning for a cut in interest rates and a subsequent improvement in consumer spending. Utilities suffered the largest loss of -2.9%, partially attributed due to a fall in electricity futures.

The CRB Index fell by -4.3% over July, pulled down by falls for iron ore and Brent crude oil of -4.2% and -6.6%, respectively.

The gold price jumped by 5.2% to US2,447.60/oz and the Gold sector rallied 8.4% largely supported by a fall in bond yields in response to an increased probability of rate cuts, explains Macquarie. The sector gain was driven by a 16% gain for Newmont Corp ((NEM)), but there were also strong gains in small cap gold stocks such as Resolute Mining ((RSG)) and Genesis Minerals ((GMD)), which gained 25% and 19%, respectively.

The US dollar Index (DXY) a measure of the value of the US dollar relative to a basket of foreign currencies, fell by -1.7% to 104.10, and the Australian dollar also moved lower by -1.9% to US$0.6550.

Because of weaker shares for the Magnificent Seven, Macquarie’s proprietary FOMO meter (which measures equity sentiment) fell to 1.17 by the end of July, having reached 1.48 mid-month.

Still, a FOMO meter reading above 1.0 indicates bullish sentiment based on the market expectation for interest rate cuts in the US, and the hope this will prevent a large rise in unemployment, explains the broker.

ASX cash futures had assigned a 5% likelihood of an interest rate easing by the Reserve Bank in early-August, notes Macquarie, and a slightly better than 1-in-10 chance for a -50bps move in September by the Federal Reserve in the US.

Domestically, Morgan Stanley believes the path for earnings remains challenged and the upcoming corporate reporting season presents ongoing risk.

This broker believes interest rates are now on hold in Australia with the first cut likely in May 2025.

Macquarie cautions August is generally a mixed month and September is typically negative, and the worst month of the year for investment returns from the local share market.

For more on Australian banks, see further below.

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

Company	Change	Company	Change
LLC – LENDLEASE GROUP	16.08	S32 – SOUTH32 LIMITED	-16.12
NEM – NEWMONT CORPORATION REGISTERED	16.04	FMG – FORTESCUE LIMITED	-11.86
GPT – GPT GROUP	15.75	DMP – DOMINO’S PIZZA ENTERPRISES LIMITED	-8.69
JHX – JAMES HARDIE INDUSTRIES PLC	15.58	PDN – PALADIN ENERGY LIMITED	-8.57
MGR – MIRVAC GROUP	14.44	ILU – ILUKA RESOURCES LIMITED	-7.48

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

Company	Change	Company	Change
IRE – IRESS LIMITED	32.05	STX – STRIKE ENERGY LIMITED	-28.57
CRN – CORONADO GLOBAL RESOURCES INC	21.52	LIC – LIFESTYLE COMMUNITIES LIMITED	-27.59
MFG – MAGELLAN FINANCIAL GROUP LIMITED	21.38	BGL – BELLEVUE GOLD LIMITED	-23.25
IFL – INSIGNIA FINANCIAL LIMITED	20.96	S32 – SOUTH32 LIMITED	-16.12
GMD – GENESIS MINERALS LIMITED	19.09	AWC – ALUMINA LIMITED	-14.45

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

Company	Change	Company	Change
IRE – IRESS LIMITED	32.05	MEI – METEORIC RESOURCES NL	-35.48
ZIP – ZIP CO LIMITED	30.82	CXL – CALIX LIMITED	-28.87
RSG – RESOLUTE MINING LIMITED	25.00	STX – STRIKE ENERGY LIMITED	-28.57
VUL – VULCAN ENERGY RESOURCES LIMITED	21.54	LIC – LIFESTYLE COMMUNITIES LIMITED	-27.59
CRN – CORONADO GLOBAL RESOURCES INC	21.52	SYR – SYRAH RESOURCES LIMITED	-26.76

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

Company	Change	Company	Change
APX – APPEN LIMITED	59.57	BRN – BRAINCHIP HOLDINGS LIMITED	-15.91
IRE – IRESS LIMITED	32.05	WBT – WEEBIT NANO LIMITED	-7.84
NXL – NUIX LIMITED	12.01	4DX – 4DMEDICAL LIMITED	-7.69
TNE – TECHNOLOGY ONE LIMITED	10.65	AD8 – AUDINATE GROUP LIMITED	-6.06
SDR – SITEMINDER LIMITED	10.02	WTC – WISETECH GLOBAL LIMITED	-5.22

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

Australia & NZ

Index	31 Jul 2024	Month Of Jul	Quarter To Date (Jul-Sep)	Year To Date (2024)
NZ50	12405.270	5.87%	5.87%	5.39%
All Ordinaries	8320.40	3.83%	3.83%	6.27%
S&P ASX 200	8092.30	4.18%	4.18%	6.61%
S&P ASX 300	8026.00	4.12%	4.12%	6.50%
Communication Services	1580.40	5.28%	5.28%	-0.49%
Consumer Discretionary	3830.30	9.08%	9.08%	18.21%
Consumer Staples	12847.70	3.79%	3.79%	4.36%
Energy	9994.40	-0.37%	-0.37%	-5.92%
Financials	8136.80	6.26%	6.26%	21.11%
Health Care	46324.40	4.67%	4.67%	9.41%
Industrials	7196.10	5.65%	5.65%	4.81%
Info Technology	2346.60	0.22%	0.22%	28.03%
Materials	16859.90	-0.11%	-0.11%	-13.50%
Real Estate	3798.80	6.61%	6.61%	13.47%
Utilities	9020.30	-2.85%	-2.85%	10.28%
A-REITs	1734.50	6.78%	6.78%	15.45%
All Technology Index	3179.00	1.31%	1.31%	18.00%
Banks	3420.70	7.06%	7.06%	23.07%
Gold Index	7974.70	8.39%	8.39%	8.24%
Metals & Mining	5484.50	-1.19%	-1.19%	-15.19%

The World

Index	31 Jul 2024	Month Of Jul	Quarter To Date (Jul-Sep)	Year To Date (2024)
FTSE100	8367.98	2.50%	2.50%	8.21%
DAX30	18508.65	1.50%	1.50%	10.49%
Hang Seng	17344.60	-2.11%	-2.11%	1.74%
Nikkei 225	39101.82	-1.22%	-1.22%	16.85%
DJIA	40842.79	4.41%	4.41%	8.37%
S&P500	5522.30	1.13%	1.13%	15.78%
Nasdaq Comp	17599.40	-0.75%	-0.75%	17.24%

Metals & Minerals

Index	31 Jul 2024	Month Of Jul	Quarter To Date (Jul-Sep)	Year To Date (2024)
Gold (oz)	2456.00	5.05%	5.05%	20.13%
Silver (oz)	28.53	-2.46%	-2.46%	17.02%
Copper (lb)	4.0920	-5.57%	-5.57%	7.46%
Aluminium (lb)	1.0067	-10.48%	-10.48%	3.54%
Nickel (lb)	7.2378	-6.95%	-6.95%	-2.68%
Zinc (lb)	1.1939	-9.97%	-9.97%	6.16%
Uranium (lb) weekly	82.00	-1.50%	-1.50%	-4.65%
Iron Ore (t)	106.25	-0.24%	-0.24%	-23.14%

Energy

Index	31 Jul 2024	Month Of Jul	Quarter To Date (Jul-Sep)	Year To Date (2024)
West Texas Crude	75.25	-8.07%	-8.07%	1.95%
Brent Crude	78.54	-8.08%	-8.08%	-0.91%

Australian Banks

The average major bank total shareholder return of 6.7% in July convincingly beat the 4.2% return from the ASX200 index.

Among the majors, Westpac ((WBC)) was the best performer with a 9.4% return, while ANZ Bank ((ANZ)) gained the least with a 2.9% return. In between, shares in CommBank ((CBA)) and National Australia Bank ((NAB)) gained 7.9% and 6.5%, respectively.

The smaller banks also outperformed with shares in Judo Capital ((JDO)), Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) gaining 10.3%, 8.7% and 8.6%, respectively.

Bank share prices already reflect all the benefits of rate cuts, a soft landing and less competition, according to Morgan Stanley. The broker concedes it has underestimated the rally for bank shares so far in 2024.

Despite healthy balance sheets and capital management initiatives, the analysts suggest current trading multiples are not supported by the banks’ growth and return profiles.

Morgan Stanley highlights the major banks’ average dividend yield of around 4.7% is 0.4% above the bond yield, which compares to the post-2010 average of 2.8% above the bond yield.

New Zealand

In common with the ASX200, nearly every sector in the NZX50 gained in July, boosted by softening inflation and expectations of interest rate cuts domestically.

The NZX50 gained 5.87% for the month bringing the year-to-date gain to 5.39%. 

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