May In Review: AI Momentum, Healthcare Pain

Array
(
    [0] => Array
        (
            [0] => ((IGO))
            [1] => ((CMM))
            [2] => ((SFR))
            [3] => ((S32))
            [4] => ((BHP))
            [5] => ((CSC))
            [6] => ((RIO))
            [7] => ((FMG))
            [8] => ((MAH))
            [9] => ((MP1))
            [10] => ((WBT))
            [11] => ((GMG))
            [12] => ((CBA))
            [13] => ((WBC))
            [14] => ((NAB))
            [15] => ((BXB))
            [16] => ((ASX))
        )

    [1] => Array
        (
            [0] => IGO
            [1] => CMM
            [2] => SFR
            [3] => S32
            [4] => BHP
            [5] => CSC
            [6] => RIO
            [7] => FMG
            [8] => MAH
            [9] => MP1
            [10] => WBT
            [11] => GMG
            [12] => CBA
            [13] => WBC
            [14] => NAB
            [15] => BXB
            [16] => ASX
        )

)

This story features IGO LIMITED, and other companies.
For more info SHARE ANALYSIS: IGO
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Amidst many macro headwinds, the ASX200 achieved a positive total return in May, thanks to dividends, but couldn't keep up with the positive AI-led momentum elsewhere.

• A moribund Australian market refused to weaken in May
• Banks and Healthcare heavyweights dragged on the market
• Commodities provided support as investors focused on strong AI-led demand
• The ASX underperformed against more AI-oriented markets internationally

By Danielle Ecuyer

Cup half full or half empty?

It wasn’t a complete ‘Sell in May and Go Away’ scenario for the Australian market, but for many investors the ride has been, let’s say, challenging at best.

The ASX200 scraped in with a 1.15% total return to 8,731.70, which belied the volatility under the surface and the narrow market leadership.

Morgan Stanley points out there were eight sessions throughout the month registering moves of plus/minus 1% or more on the day.

Depending on which lens the market is viewed through, the performance could be described as ‘admirable’ given the trifecta of bad news thrown at it.

Think ongoing war in the Middle East (energy price crisis), another RBA rate hike, plus a Federal Budget with the associated changes to negative gearing and capital gains tax.

As noted by GF Asset Management, “the Australian consumer is being hit from three directions at once”.

Compared to offshore markets, notably Korea, Taiwan, Japan and the US, Australia came in near the bottom of global equity performance rankings.

Driven by the AI-related memory chip demand boom, Korean equities rose 35.2% in USD terms, the US S&P500 was up 5.3%, and Japan was up 5%. In USD terms, the Australian market squeezed out a 1% gain, beating the UK, down -0.3%, China, off -3%, and Latam, down -4.2%. All in USD currency for consistency.

Morgan Stanley argues the ASX200’s “structural underweight”  to global growth (giants) serves to emphasise the market’s dependence on banks, resources and interest rate (yield) sensitive sectors. Those sectors were not the ones flying high internationally in May.

To be fair, Australia is not alone with a more traditional cyclically exposed market/economy. Other developed markets like the UK and Europe have, to a greater or lesser extent, also less of a growth/tech leaning than the US and selected Asian markets.

Ongoing enthusiasm for the AI trade and considerably higher than expected corporate earnings growth propelled the US market higher.

From the late-March low, the Nasdaq100 has surged 33% in just nine weeks to a month-end close of 30,470.

The other side of AI

It’s not quite the same, but AI-enablers were the top performers in Australia in May, Macquarie points out, led by the Mining sector, up 10.4%, and Capital Goods, up 9%.

Domestic miners have emerged as the “key proxy” for the AI trade down under, led by strong AI-led demand for commodities, including copper (up 8.2%), aluminium (up 5.5%), as well as stronger iron ore and LNG prices.

Scoping the top five ASX200 performers highlights the money flows into commodity stocks, including lithium exposures, with IGO Ltd ((IGO)), Capricorn Metals ((CMM)), Sandfire Resources ((SFR)), South32 ((S32)) and BHP Group ((BHP)) among the leaders.

Capstone Copper ((CSC)) shares rose 32% as one of the mointh’s top performers in the ASX300.

Morgan Stanley points to BHP adding 165bps out of the total 261bps uplift by the Materials sector to the index. Rio Tinto ((RIO)) added 26bps and Fortescue ((FMG)) 17bps.

Scratch a little deeper under the surface of the ASX200 index and the complexion of the market becomes apparent.

The broader build-out in power, mining services, data centres and infrastructure, all underpinned by global AI spend, saw robust buying across Capital Goods, with MacMahon Holdings ((MAH)) up 36%, Service Stream up 21% and Ventia Services up 18%.

Megaport ((MP1)), through its network and compute as-a-service business model, was equally a clear AI beneficiary, as its shares went up 71.3%, boosted by contract wins for its recently acquired Latitude business. Weebit Nano ((WBT)) shares rose 80.8% on its resistive RAM (random access memory).

Other sectors in the green included Real Estate, up 2.46%, and A-Reits, up 2.97%, with Goodman Group ((GMG)) boosting the latter sector’s performance.

Interestingly, Consumer Discretionary gained 4.56%, suggesting to Macquarie that investors are already pivoting to cyclical retail (up 6.3%), positioning for the next RBA rate move to be a cut.

A softer than expected April CPI print gave markets some wiggle room to price out further RBA rate hikes, while global bond yields edged down over May as markets looked beyond the Middle East conflict.

Healthcare in pain (again!)

An -18% fall in Brent crude and WTI boosted a more ‘transitory’ narrative around global energy inflationary pressures and also led the domestic Energy sector down -5.88% for May.

The gold price slipped slightly over May, but the Gold index fell -2.5% as investors weighed up the impact of rising costs on producers.

Sectors which had outperformed in a more risk-off environment in April, including Communication Services and Consumer Staples, fell -4.19% and -1.86%, respectively.

The Banks were among the heavier losers as concerns over loan growth and a slowing housing sector weighed on sentiment. The sector fell -5.33% and is now down -3.6% year-to-date.

Morgan Stanley explains Financials weighed on the ASX200 index by a negative -97bps, or -105bps led by the Banks. CommBank’s ((CBA)) negative impact was the heftiest at -55bps, followed by Westpac ((WBC)) at -21bps and National Australia Bank ((NAB)) at -20bps.

Healthcare continued to experience multiple travails, falling -9.18%. Sector heavyweight CSL again downgraded the FY26 earnings outlook, sending its share price down -16% on the day.

Over May, CSL shares declined by -23%. Over the last three months, Healthcare, which historically behaved as a defensive sector, is down -22%.

There were plenty of profit warnings and set-backs elsewhere. Brambles ((BXB)), long regarded as a ‘quality stock’, announced a surprise earnings downgrade due to pallet repair issues, sending that share price down an unforgiving -25%.

The bourse itself ((ASX)) served up another negative guidance downgrade, punishing ASX shares by -20%.

Macquarie points out the move by central banks to “net hikes” is likely to generate larger share price reactions, exacerbated by a higher interest rate backdrop than the implied fall in earnings. Arguably, investor discomfort around unexpected negative surprises has also eroded valuations.

In the case of CSL, the premium once ascribed has been replaced with a valuation discount as earnings momentum has faltered, eroding the market’s confidence in a successful turnaround.

According to FNArena’s Corporate Results Monitor, more than 40% of financial results post February have disappointed (many occurred in May), with 33.33% surprising to the upside and nearly 26% roughly meeting expectations.

https://fnarena.com/index.php/reporting_season/

Climbing a wall of worry in June

Looking ahead, Morgan Stanley considers the RBA’s “communication” at its June meeting on June 16 as “critical”.

This broker’s base case is the central bank stays on hold following the weaker CPI print and labour data, which would be supportive for interest rate sensitive sectors.

Notably, the proposed Federal Budget changes have implications for the domestic housing sector and prices. The significant leverage of the household sector via wealth effects and construction employment has broader implications for Australian equities.

On that basis, Morgan Stanley views commodity markets as the main source of earnings momentum for the ASX. The broker remains Overweight in its model portfolio on Resources and maintains an Underweight position on Banks against flattening interest rates, the emergence of margin pressures and slowing economic growth.

Pressure on domestic EPS growth, due to the heavy weighting to banks and interest rate sensitive sectors, means Morgan Stanley prefers capex, particularly AI infrastructure and resource mining activity tailwinds, over consumption thematics.

Macquarie highlights the ongoing outperformance of Value, up 4.7% in May and up 41% over the last year, boosted by Resources. Technology and Healthcare, in contrast, have underperformed.

In the US, the Momentum trade has been the strongest, up 13% in May and outperforming US Value by more than 10 percentage points.

Regarding sentiment, the FOMO meter fell -16bps in May to plus-0.70.

Macquarie suggests it signals “positive” but not excessive “optimism”.

Individual investors were responsible for the decline, positioned net bearish at -6 percentage points.

Active investors remain positive, lifting equity exposure to plus-98.4 in the broker’s latest survey.

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

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