The S&P/ASX 200 Accumulation Index returned 1.5% during the month. Australian equities underperformed key offshore markets as a strong reporting season was offset by a surge in 10-year bond yields late in the month on the back of inflationary expectations. The global roll-out of COVID-19 vaccines and US fiscal stimulus saw the reflation trade take hold. In major global developed markets, the UK’s FTSE 100 was up 1.6%, the US S&P 500 was up 2.8%, the DJ Euro Stoxx 50 was up 4.6% and Japan’s Nikkei 225 was up 4.8%, (in local currency terms). In Australia, value outperformed growth for the fifth month in a row.
Monetary policy settings remained unchanged in February, as the Reserve Bank of Australia (RBA) maintained both the cash rate and 3-year yield target at 0.10%. The RBA also indicated it will purchase an additional AUD100 billion of bonds when the current bond purchase program is completed in mid-April.
Domestic economic data releases in February were mostly upbeat. Employment rose by 21,900 positions in January. The unemployment rate ticked lower to 6.4%, which was better than expected. The NAB Survey of Business Conditions fell to 7 in January. Business confidence however jumped to 10, which is well above the long run average. Retail sales were down 4.1% in December. National CoreLogic dwelling prices saw a fifth consecutive monthly rise in February, ending the month up 2.1%, with regional housing values continuing to outpace capital cities, although the gap has narrowed.
Despite COVID-19, the February reporting season was one of the best in many years. This was largely due to the cautious approach going into reporting season due to COVID-19 related uncertainty and a lack of guidance in 2020. Approximately 51% of stocks beat on EPS. The banks were a highlight, reporting significant beats due to lower impairments but also generally better than expected underlying results. Energy was the weakest sector, recording more misses than beats. Overall, FY21 EPS ended up being revised up by 5.0% over the course of the month. Dividend forecasts were also revised upwards.
Sector returns varied widely in February. The best, and only positive sectors, were materials (7.3%), financials (5.2%) and energy (2.4%). All remaining sectors underperformed the index: communication services (-0.3%), industrials (-1.8%), real estate (-2.6%), consumer discretionary (-2.9%), health care (-2.9%), consumer staples (-4.6%) and utilities (-8.0%). Information technology (-8.9%) was the worst performing sector.
The materials sector outperformed with commodities enjoying continued strength on the expectation of resilient demand as global economies benefit from stimulus, USD weakness and the progressive rollout of COVID-19 vaccines. The key contributors to sector performance were BHP (12.8%), Rio Tinto (15.3%) and Fortescue Metals (10.6%).
The financials sector outperformed on the back of rising bond yields and having exceeded expectations during reporting season, thanks to lower impairments and better than expected underlying results. The key drivers included the following: Westpac (12.7%), ANZ (10.4%), National Australia Bank (4.6%) and Macquarie Bank (8.4%).
Despite a poor showing during reporting reason, the energy sector outperformed on the back of a rise in oil prices. Key drivers of sector performance included Santos (12.0%) and Oil Search (9.3%).
Consumer staples underperformed as the market is adjusting to the reality that once COVID-19 passes, some businesses are likely to report weaker results. The key detractors included Coles (-14.0%), Woolworths (-3.6%) and A2 Milk (-16.0%). Coles was the worst detractor, having commented in their outlook that sales growth will be low or possibly negative once the COVID-19 impact rolls off.
The utilities sector underperformed as a result of surging bond yields. Key detractors included AGL Energy (-14.8%), APA Group (-5.1%) and Spark Infrastructure (-7.3%).
The information technology sector was the worst performer, in part due to rising bond yields. Key drivers of underperformance included Afterpay (-11.5%) and Xero (-8.8%).