Stock Market Wrap-up – February 2020

The S&P/ASX 200 Accumulation Index returned -7.7% during the month. Australian equities marginally outperformed global equity markets in February, as the spread of the coronavirus saw global markets sell off sharply. Emerging markets outperformed developed markets, ironically thanks to China’s relative outperformance during the month as new virus cases slowed within the country. In major global developed markets, the S&P 500 was down 8.2%, the DJ Euro Stoxx 50 was down 8.4%, Japan’s Nikkei 225 was down 8.8%, and the UK’s FTSE 100 was down 9.0%.

The cash rate remained unchanged during February at a record low of 0.75%. The Reserve Bank of Australia (RBA) acknowledged the uncertainty being created by the coronavirus and reiterated that they would ease monetary policy further if needed “to support sustainable growth in the economy, full employment and the achievement of the inflation target over time”.

Domestic economic data releases were mixed in February. Employment rose by 13,500 positions in January which exceeded expectations. The unemployment rate jumped to 5.3% from 5.1%. The NAB Survey of Business Conditions was steady in January at +3 points and business confidence remained negative at -1. December retail sales were lower than expected, falling 0.5%. National CoreLogic dwelling prices continued to post gains, rising 1.0% in February.

While the reporting season should have been the main focus in February, it was overshadowed by the coronavirus. Companies reported various impacts, including but not limited to, the impact of travel restrictions (airlines/travel/leisure stocks), lower commodity prices (resources ex gold stocks) and the impact on supply chains (retail/manufacturing stocks). This means the hopes for an earnings recovery in FY20 have now been pushed out again. Offshore earners may fare better however, as the falling Australian dollar should cushion the impact. Overall during reporting season, downgrades dominated with three times the number of FY20 earnings downgrades, than upgrades. Sector wise, real estate and industrials delivered the best results, while financials, consumer discretionary, communications and health care had more earnings misses, than beats for the period.

All sector returns were negative in February. The best performing sector was utilities (-3.6%), followed by health care (-3.7%) and real estate (-4.6%). These were followed by financials (-4.9%) and consumer staples (-7.1%) which also outperformed the broader market. Sectors that lagged included industrials (-8.2%), communication services (-8.6%), consumer discretionary (-8.6%), materials (-11.7%) and energy (-17.2%). Information technology (-17.3%) was the worst performing sector.

The utilities sector was the best performer locally, as investors sought refuge in defensive stocks. Both APA Group (-5.2%) and AGL Energy (-1.8%) outperformed the broader market.

The health care sector benefitted from solid results in key stocks such as CSL (-0.8%) and ResMed (-2.2%). Meanwhile Cochlear (-13.9%) underperformed the market, with the coronavirus expected to impact FY20 earnings.

The real estate sector benefitted from solid results and modest EPS upgrades during reporting season. Some of the best performing names included Goodman Group (0.6%), Lendlease (-1.1%), GPT Group (-3.7%) and Dexus (-4.4%).

The materials sector lagged in February as global risk-off sentiment continued to take its toll on commodities. Key detractors included BHP (-14.7%), Rio Tinto (-11.6%), Newcrest Mining (-10.6%), South32 (-15.9%) and Fortescue Metals (-11.5%).

The energy sector also underperformed the broader market due to the fall in oil prices and LNG supply contract risk escalated. Key detractors included Woodside Petroleum (-17.5%), Santos (-20.6%) and Oil Search (-24.2%).

Information technology was the worst performing sector. Key detractors included Wisetech Global (-39.7%), Xero (-13.9%), Computershare (-13.7%) and Link Administration (-30.9%).

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