August In Review: Technology Powers On

The ASX200 rose 2.2% in August with technology and consumer discretionary leading the way during the reporting season, while further trading updates are expected during the upcoming AGM season.

–The ASX200 climbed 2.2% during August, gaining 2.8% including dividends
-Information technology rose, while utilities fell
-The Small Ordinaries gained 7.3% for the month

By Mark Woodruff

The Australian stock market ended August with the ASX200 rising 2.2% to close the month at 6,061 points, for a total gain of 2.8% including dividends. This was the fifth consecutive month of gains.

To gain a helicopter world view of stock markets during August, the Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) index rose 6.5%. The MSCI ACWI is comprised of around 3,000 stocks from 23 developed countries and 26 emerging markets.

The August surge has carried the MSCI World Index into positive territory in the year-to-date, with the index now up 3.5%. The two countries driving the gains are China up 17.3% and the US up 10.0%.

Most global developing market sectors rose, with consumer discretionary and technology outperforming, while utilities, REITs and energy underperformed.

The S&P500 in the United States rose 7.25% and the technology heavy Nasdaq was up nearly 10% over the month.

Relative underperformance by Australia

Banks (-0.6%) and materials (+0.3% rise) are the largest sectors in the ASX300, with a weighting of 17.5% and 20% respectively. In an analysis by stockbroker Macquarie, if US sector weights were applied, the ASX300 would have risen 5.2% in August.

Of course, a lot of that US outperformance is attributable to technology stocks which account for around 28% of the S&P500 index. The weighting of around 4% technology on the local bourse is too small to provide a material lift to the overall market. Additionally, the US outperformance doesn’t factor in country-specific swing factors such as the August profit reporting season for stocks on the ASX.

JP Morgan notes, while global earnings per share expectations picked up across August, forecasts for Australia barely moved through the month. This gap, in the broker’s view, is a key factor in the ASX200’s underperformance over the past month. Other contributors to underperformance are considered to be a resurgent Australian dollar, index composition and comparatively deep dividend cuts.

Industrials outperformed resources across the various ASX indices by size, with Small Industrials the best performing. Small caps were preferred over mid and large cap stocks, with the Small Ordinaries returning 7.2% versus 2.5% for the ASX100 Index.

The best performing sectors in Australia were information technology, consumer discretionary and real estate, while utilities, communication services and consumer staples were laggards.

Some key downgrades at a stock level through August were Qantas Airways ((QAN)), Sydney Airport ((SYD)), Seek ((SEK)), Telstra ((TLS)), Commonwealth Bank ((CBA)), Challenger ((CGF)), GPT Group ((GPT)) and Unibail-Rodamco-Westfield ((URW)).

Top % Gainers and Losers

The best performing ASX100 stocks during the month were Reliance Worldwide ((RWC)), WiseTech Global ((WTC)) and Afterpay ((APT)). The worst performers were Treasury Wine Estates ((TWE)), ResMed ((RMD)) and Saracen Mineral Holdings ((SAR)).

Other notable rises were within the travel sector and included Flight Centre ((FLT)), Qantas Airways and Sydney Airport. In the top ten for percentage declines were two gold stocks in Northern Star Resources ((NST)) and Newcrest Mining ((NCM)). Also appearing were two defensive industrials in Telstra and AGL Energy ((AGL)).

Among the Small Ordinaries, the best performers were Pointsbet Holdings ((PBT)), Corporate Travel Management ((CTD)) and Zip Co ((Z1P)). The worst performers were Whitehaven Coal ((WHC)), Australian Ethical Investment ((AEF)) and Mayne Pharma ((MYX)).

August reporting season

Surprises:
The biggest large cap positive surprises for UBS were Cleanaway Waste Management ((CWY)), JB Hi-Fi ((JBH)), Reliance Worldwide, Suncorp ((SUN)) and Treasury Wine Estates.

The biggest negative surprises were from Bendigo and Adelaide Bank ((BEN)), Origin Energy ((ORG)), ResMed, Telstra and Vicinity Centres ((VCX)).

Banks:
The reporting season highlighted to JP Morgan the competitive, low-rate world in which banks are operating. This has led to credit quality deterioration, elevated costs and revenue pressures.

The broker’s top pick in the sector remains National Australia Bank ((NAB)). The overall sector is considered in need of greater macroeconomic certainty to re-rate. Capital surprise and re-emergence of dividends is helpful but might not be enough on their own.

Commodities and Currency

The Australian dollar continues to strengthen, rising 3% in August, and is now up 10% over the last year. It gained support from a weaker US dollar, improving Chinese growth and impressive strength in commodity prices.

Iron ore, nickel and zinc all posted double-digit gains, while copper and Brent crude both rose around 4%. Australia’s high weighting to mining and energy is expected to be an advantage if commodity prices continue to recover.

Bonds

Global bond yields rose sharply in August, with US 10 year government bond yields rising 17 basis points to 0.70%. The Australian 10 year government bond yields also rose 17 basis points to 0.98%. This was largely driven by rising inflation.

The future for bond yields is all about the US Federal Reserve and in particular the new FOMC framework, according to JP Morgan. The Fed had previously strongly signalled it was moving toward average inflation targeting, though the announcement in August came a little sooner than the broker expected.

Whether this strategy shift will actually raise inflation outcomes and inflation expectations will depend on the success of the Fed’s actions.

Technology

As noted above, it was another month of technology outperformance, led by the WAAAX* stocks (market cap weighted), which were up 23%, while the S&P/ASX All Technology index rose 13.1%.

Technology was the best performing sector, with the rise driven by WiseTech Global soaring 36% and Afterpay rising 33%.

Other best performers within the technology index were Redbubble ((RBL)), Hansen Technologies ((HSN)) and Bigtincan ((BTH)), while PainChek ((PCK)), ELMO Software ((ELO)) and Resapp Health ((RAP)) were the worst performers.

Listed as Outperforms by Credit Suisse in order of preference are Infomedia ((IFM)), Xero ((XRO)) and Life360 ((360)). The broker is Neutral on Audinate Group ((AD8)), Iress ((IRE)) and WiseTech, while Appen ((APX)) has been marked down to Underperform due to a recent downgrade.

*Wisetech, Afterpay, Altium ((ALU)), Appen ((APX)) and Xero.

Small Ordinaries

The small ordinaries ended the month of August with a gain of 7.3%, which outperformed both mid cap and large cap indices that returned 6.3% and 2.5%, respectively.

Small industrials were up 9.6%, outperforming the ASX100 Industrials by 6.7%, while small resources were down -1.5%, underperforming the ASX 100 Resources by -2.7%.

As alluded to previously, the best performing stock was Pointsbet Holdings which rallied following the announcement of its FY20 result and a partnership agreement with NBCUniversal. Corporate Travel rallied on the expectation of the return of international travel. The third largest percentage rise was Zip Co after reporting a result ahead of expectations and some positive indications for trading of its newly acquired US business QuadPay.

The worst performers were Whitehaven Coal on soft guidance and rising debt levels. Australian Ethical Investment ((AEF)) fell after IOOF Holdings ((IFL)) sold down a large proportion of its stake in the company and Mayne Pharma ((MYX)) declined on concerns over ongoing price erosion of generic drugs.

Looking Forward

Guidance continues to be replaced with rolling trading updates with the AGM season the next checkpoint.

Macquarie notes domestic industrials and banks are forecast to deliver another year of falling earnings per share in FY21, albeit still much improved on FY20. The broker continues to favour resources over industrials, given the expectation that higher commodity prices can support an earnings upgrade cycle.

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