Stock Market Wrap-up – December 2019

The S&P/ASX 200 Accumulation Index returned -2.2% during the month. Australian equities posted a negative return during December, while global equity markets recorded broadly positive returns during the month. Emerging markets outperformed developed markets. In major global developed markets, the S&P 500 was up 3.0%, the UK’s FTSE 100 was up 2.8% and Japan’s Nikkei 225 was up 1.7%. The DJ Euro Stoxx 50 was the laggard, rising 1.2%.

The Reserve Bank of Australia (RBA) left the cash rate unchanged at the record low of 0.75% at the December meeting. The RBA 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 December. The Australian economy grew by 0.4% over Q3 2019, with the annual rate running edging up to 1.7%. Employment rose by 39,900 positions in November (mostly in part-time positions) which was well above expectations. The unemployment rate edged lower from 5.3% to 5.2%. The NAB Survey of Business Conditions was unchanged in November at +4 index points and business confidence fell 2 points to 0, unwinding the increase of last month. October retail sales were flat, missing market expectations of a 0.3% gain. National CoreLogic dwelling prices continued to post gains, rising 1.1% in December.

In company specific news, Lendlease (-8.9%) disappointed the market after announcing only a partial sale of its engineering business, not a full sale that the market was anticipating. Whitehaven Coal (-16.2%) also disappointed the market after lowering FY20 production guidance due to manning issues at Maules Creek, Whitehaven’s largest operation and also impacts from dust events relating to the severe drought conditions in north west NSW.

Sector returns were mostly negative in December. The best performing sector was materials (1.6%), which was followed by the only other positive returning sector, utilities (0.8%). Energy (-1.5%), financials (-1.6%), consumer discretionary (-2.5%), healthcare (-2.7%), industrials (-3.0%), information technology (-4.6%), real estate (-4.8%) and communication services (-5.8%) all posted negative returns for the month. The worst performing sector was consumer staples (-8.1%).

Materials was the best performing sector in December, led by BHP (1.8%), Fortescue Metals Group (9.9%) and Rio Tinto (3.6%). The materials sector benefitted from a broad commodity price rally during December, due to stronger than expected economic data out of China and the reaching of a Phase 1 trade deal between the US and China.

The utilities sector was the only other positive performer this month. APA Group (2.9%) and AGL Energy (0.6%) were the key drivers of outperformance.

The energy sector outperformed the broader market despite posting a negative return. Key positive contributors included Beach Energy (4.6%) and Cooper Energy (13.1%), while Whitehaven Coal (-16.2%) was the biggest detractor.

The yield-sensitive real estate sector underperformed the broader market as bond yields sold off. Stocks that detracted from sector performance included Goodman Group (-8.8%), Lendlease (-8.9%) and GPT Group (-6.8%).

The communication services sector also underperformed during December due to its yield sensitivity. The key detractor was sector heavyweight Telstra (-8.3%), which gave back most of its November gains as bond yields sold off during the month.

The consumer staples sector was the worst performer during the month. Key drivers of the underperformance included Woolworths (-9.1%), Treasury Wine Estates (-13.2%) and Coles (-8.7%).

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