Stock Market Wrap-up – May 2020

The S&P/ASX 200 Accumulation Index returned 4.4% during the month. Australian equities rallied along with global equity markets in May. Global equity markets surged in response to growing confidence in government stimulus and further easing of lockdown measures. In major global developed markets, Japan’s Nikkei 225 was up 8.3%, the US S&P 500 was up 4.8%, the DJ Euro Stoxx 50 was up 4.9% and the UK’s FTSE 100 was up 3.3%.

The Reserve Bank of Australia (RBA) held the cash rate steady at 0.25% in May and maintained the 3-year bond yield target of 0.25%. The functioning of the domestic government bond market has improved and the RBA has scaled back the size and frequency of bond purchases after initially purchasing around AUD 50 billion in bonds. They retained their commitment to scale up buying again if needed in order to keep funding costs low and maintain credit availability to households and businesses.

Domestic economic data releases were mostly weaker in May as the effects of COVID-19 began to show through in the data. Employment fell by 594,300 positions in April, the largest drop on record. The unemployment rate in April rose by less than the market had feared, rising to 6.2% (from 5.2% in March), while the market had expectations of 8.3%. The participation rate fell to 63.5%, a level not seen for over 15 years. The NAB Survey of Business Conditions fell further in April to -34.1points, while business confidence improved but remains weak at -45.7. March retail sales were up 8.5%, led predominately by panic buying of food and other essential items. National CoreLogic dwelling prices fell 0.1% in May, their first month-on-month decline since June 2019.

During May the market continued to see companies raising capital, however not at the pace or scale seen in April. That said, the ASX’s temporary measures to assist listed entities to raise capital are set to remain in place until the end of July and further capital raisings are expected. Some of the names to raise capital in May included Incitec Pivot, Blackmores, Atlas Arteria, National Storage REIT and United Malt.

Sector returns were mostly positive in May. The best performing sectors were information technology (14.5%), communication services (8.4%), materials (8.1%). These were followed by real estate (6.8%), consumer discretionary (6.5%), financials (5.2%) and energy (4.7%) which also outperformed the broader market. Sectors that lagged included industrials (3.7%), utilities (3.1%) and consumer staples (-0.4%). Healthcare (-5.3%) was the worst performing sector.

The information technology sector was the best performer during May. Afterpay Touch (51.9%) was the sector’s best performing stock, with the stock re-rating after Chinese technology giant, Tencent, took a 5% interest in Afterpay at a premium to the prevailing price. Computershare (7.6%) and Xero (7.2%) also outperformed.

The communication services sector also outperformed. Sector heavyweight Telstra (6.2%) outperformed, having announced that it was ahead of schedule on its 5G roll-out and the launch of a supercharged 5G trial of evolutionary mmWave technology. Other stocks to contribute to outperformance included Seek (15.6%) and REA Group (12.8%).

The materials sector enjoyed a good month on the back of stronger commodity prices. Iron ore prices in particular increased significantly, while the price of gold and oil also rose. BHP (7.1%), Fortescue Metals (16.2%) and Newcrest Mining (11.0%) were the biggest contributors to sector performance. A number of defensive sectors underperformed including the utilities sector. AGL Energy (-1.2%) and Ausnet Services (-3.8%) were the key detractors.

Consumer staples also underperformed in May as markets took a “risk-on” tone and defensives underperformed. Woolworths (-1.1%), A2 Milk (-2.8%) and Treasury Wine Estate (-4.8%) were the biggest detractors from sector performance.

Healthcare was the worst performer in May. Sector heavyweight CSL (-10.7%) dragged on sector performance due to the general underperformance of defensive stocks. There are also signs of a growing threat to CSL’s market share in immunoglobulins following US biotech company Argenyx reporting positive Phase III trial data for a new therapy for autoimmune disease, Myasthenia Gravis.

Source: Brad Potter, Head of Australian Equities – Nikko Asset Management