Stock Market Wrap-up – February 2019

The S&P/ASX 200 Accumulation Index returned 6.0% in February.

Global equity markets continued their rebound during the month, with the Australian equity market the top performing market amongst its developed peers. Developed markets outperformed emerging markets. In major global developed markets, the Euro Stoxx 50 returned 4.4%, followed by the S&P 500 and Japan’s Nikkei 225 which returned 3.3% and 2.9% respectively. The UK FTSE 100 trailed, returning 1.5%.

The cash rate remains unchanged at 1.50%. The Reserve Bank of Australia (RBA) moved to a neutral policy bias during the month, with Governor Lowe confirming that the probability of interest rates moving in either direction appear evenly balanced. The RBA maintains its view that the Australian economy is performing well, although GDP growth had slowed unexpectedly in the September quarter. Underlying inflation remains low, but is above its trough. The RBA’s forecast for the Australian economy is for GDP growth to be around 3% for 2019 and 2% over 2020 and a small downward revision to the underlying inflation forecast for year-end means it is now expected to increase to 2%.

The latest domestic economic data releases were mixed in February. Residential building approvals for December continued their fall (–8.4%) against a market consensus of +2.0%. This sees the year-on-year slump to -22.5%. Employment rose in January to add 39,000 positions, with most of these positions being full-time (65,000 positions), whilst part-time employment fell by 26,000 positions. The unemployment rate remained steady at 5.0%. The NAB Business Conditions rebounded 4 points to +7 in January, while business confidence rose slightly to +4. Retail sales were down 0.4% in December, with November’s number being revised up to 0.5%.

The February reporting season was soft, but better than the market had feared. Weaker guidance has seen EPS growth revised downwards for FY19. While Resources remained resilient with upward EPS revisions, the Industrials ex-Financials were much weaker, with EPS revisions the lowest since 2010. The key positive surprise of the season was from better than expected capital management, with a number of special dividends and buy-backs announced.

Sector returns were mostly positive during February. The best performing sector was Financials (9.1%). This was followed by Energy (7.9%), Information Technology (7.6%), Consumer Discretionary (6.6%), Industrials (6.3%) and Materials (6.3%) which all outperformed the market. The more defensive sectors such as Communications (4.3%), Utilities (3.9%), Real Estate (2.1%) and Healthcare (1.0%) underperformed the market, with Consumer Staples (-1.5%) the worst performing sector for the month and the only sector to post negative returns.

The Financials sector was the top performing sector for February following a rally post the release of the Financial Services Royal Commission final report. The sector heavyweights dominated, with key contributions from Commonwealth Bank (8.8%), ANZ (11.9%), Westpac (9.8%) and Macquarie Group (10.4%).

The Energy sector continued its strong performance for a second month supported by the continued rebound in oil prices. Brent and WTI Crude oil and were up 9.1% and 5.9% respectively in USD terms amid supply cuts and inventory drawdowns. The top contributor was again Woodside Petroleum (9.4%), followed by Santos (8.3%) and Origin Energy (7.2%).

The Information Technology sector outperformed the market in February. Key contributors included Altium (32.3%), Appen (46.9%) and Afterpay Touch (15.9%).

The Real Estate sector underperformed the market in February. Sector heavyweight Stockland Group (-7.4%) was the main detractor to performance followed by Vicinity Centres (-5.7%). Stockland underperformed following weaker 1H19 results due to the weaker housing market and headwinds in the retail parts of its business.

The Healthcare sector also underperformed the market. Key detractors were CSL (-0.5%) and Cochlear (-11.9%). Cochlear was sold off following the release of their 1H19 result which highlighted the company’s challenges for 2019 to maintain its competitive market lead.

The Consumer Staples sector was the worst performing sector in February and the only sector to post negative returns. The key driver was the sell-off in Coles Group (-9.4%) following their 1H19 results which disappointed the market.

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