Stock Market Wrap-up – October 2019

The S&P/ASX 200 Accumulation Index returned -0.4% during the month. Global equity markets posted positive returns in October, with Australian equities lagging major developed markets. Emerging markets outperformed developed markets for the first time since January. In major global developed markets, Japan’s Nikkei 225 was up 5.4%, followed by the S&P 500, which rose 2.2%. The DJ Euro Stoxx 50 gained 1.1% while the UK’s FTSE 100 was the laggard, falling 1.9% as Brexit again came to a head.

The Reserve Bank of Australia (RBA) cut the cash rate by 0.25% to a new record low of 0.75% at its 1 October 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”. We note that the RBA kept rates on hold in November with an easing bias.

Domestic economic data releases were mixed in October. Employment increased by 14,700 positions in September, which was broadly in line with expectations. The unemployment rate edged back down to 5.2%. Retail sales missed expectations slightly, recording a 0.4% gain in August. The NAB Business Conditions index rose by 1 point to +2 in September while Business Confidence fell to 0 from +1. Both readings remain below their long run average. National CoreLogic dwelling prices continued to rise, increasing by 1.2% in October, the fourth consecutive month of gains. On the inflation front, the CPI rose 0.5% during the third quarter, while the annual rate was 1.7%. Both results were in-line with consensus.

In company specific news, IOOF was up 15.5% during the month following the news that the ANZ Wealth transaction would proceed, and at a lower price. CYBG was a strong performer during the month, up 24.5%, having gained regulatory approval to combine the acquired Virgin Money business with its existing CYBG operations and as optimism grew that a hard Brexit would be avoided. Orora sold its Australian fibre business to Nippon Paper for a very attractive enterprise value of AUD 1.7 billion that implied transaction multiples that are well in excess to the multiples that Orora was trading on. The company expects to return AUD 1.2 billion to shareholders.

Sector returns were mixed in October. The best performing sector was Healthcare (7.6%), followed by Industrials (3.0%) and Utilities (1.4%). Real Estate (1.2%), Consumer Discretionary (0.9%) and Energy (0.5%) were also positive. Communication Services (-1.5%), Materials (-1.9%), Consumer Staples (-2.2%) and Financials (-2.8%) posted negative returns. Information Technology (-3.9%) was the worst performing sector for the month.

In the Healthcare sector, the strongest performer in October, sector heavyweight CSL (9.6%) was the key driver of outperformance as the market raised consensus earnings expectations for the stock.

The Industrials sector outperformed the broader market. Stocks that contributed to sector performance included Sydney Airport (9.3%) and Brambles (7.7%).

The Utilities sector was also positive as investors continue to chase yield. Key drivers included AGL Energy (3.3%) and APA Group (1.7%).

The Consumer Staples sector underperformed. Key detractors included Treasury Wine Estate (-5.4%) and Coles (-2.7%). Treasury Wine underperformed following news that CEO Michael Clarke will retire, which negatively impacted sentiment towards the stock.

The Financials sector fell in October. Key drivers of the underperformance were the ‘big four’ banks: ANZ Bank (-6.2%), Westpac (-4.8%), National Australia Bank (-3.7%) and Commonwealth Bank (-2.7%). The recent bank AGMs have shown that compliance costs remain an issue and pressure on net interest margins continues, as low interest rates hurt the returns on deposits. Proposed changes to capital requirements by the regulator also negatively impacted the major banks.

Information Technology was the worst performing sector in October, led by falls in Afterpay Touch (-19.5%) and WiseTech Global (-24.6%). WiseTech was negatively impacted by a report making numerous allegations with regards to the company’s earnings quality. Afterpay moved lower following renewed concerns regarding sector regulation.

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