Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

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The ASX 200 shrugged off a poor reporting season and another barrage of downgrades in September to gain 1.8% during the month. Higher bond yields on the back of improving cyclical prospects saw Value outperform Growth for the first time since the December correction.  In our latest note - The Dead Cat Bounce in Aussie Value - we wrote how we thought the Value outperformance would be unsustainable without either continued cyclical improvement or recession.  By the end of the month, the Value outperformance began to wane.  Argentina (18.1%) was the strongest performing market after capital controls designed to restrict dollar access were announced.  However, Japan (5.8%), Korea (4.8%), India (4.1%) and Germany (4.1%) also performed strongly.</li>
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Australia (22.6%) and New Zealand (24%) are amongst the strongest performing developed equity markets year-to-date underpinned by their relatively high dividend yield. France (23.7%) and Europe (22.6%,) more broadly, have also performed strongly this year.</li>
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Financials (4.1%) benefitted from global curve steepening and Consumer Discretionary (3.0%) benefited from lower domestic interest rates, while Energy caught a bid from the escalation of tensions between Iran and the US. Growth sectors such as Healthcare (-2.5%), and IT (-0.6%) underperformed. The interest rate sensitive Property sector was also under pressure (2.3%) along with Communication Services (-4.2%).  Materials had a strong month led by a rally in commodity prices.</li>
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Australia is now expensive, with the earnings bar now lowered to a level more in line with our expectations of 5% (12-months forward) vs 10% at the start of reporting season. However, the think the market is more susceptible to global shocks than other developed markets due to these stretched valuations.  The 12-month forward PE multiple ended the month at 16.6x, which is now 18% above its long-run average.  IT (79%), Healthcare (43%), Industrials (40%) and Communication Services (38%) are most overvalued, with substantial PE premiums to their own history.  Only Materials (-4%) and Energy (-19%) are cheap. </li>
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Consistent with the PE expansion and weakening earnings growth backdrop, consensus EPS estimates show above-average uncertainty in Materials, Financials and IT. Earnings certainty seems better in Consumer Discretionary and Industrials.  Overall, the ASX 200 universe has higher than normal earnings uncertainty.</li>
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Retail trade data was weak again in July vs market expectations and GDP in Q2 rose by a tepid 0.5%. However, the increase in the unemployment rate from 5.2% to 5.3% meant that markets fully expected the interest rate cut that occurred this week. The Australian yield curve rose by 3bp to 24bp on the back of the global curve steepening trend.  The RBA left the cash rate unchanged, but the Bank remains locked and loaded to provide more support to the economy.  Australia posted a current account surplus in Q2 for the first time since the early 1970s on the back of strong iron ore prices, a weaker AUD and solid production growth.</li>
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SGM was the only stock that lowered guidance, despite the barrage of downgrades across the market.  CBA, AGL, CPU and WES saw the largest number of net downgrades, while FMG, ALL, BPT and NCM saw the largest number of net upgrades.  The 20 stocks with the largest number of upgrades have rallied by an average 22% over the past 6 months vs 1.5% for the 20 stocks with the largest number of downgrades.</li>
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The ASX 200 shrugged off a poor reporting season and another barrage of downgrades in September to gain 1.8% during the month. Higher bond yields on the back of improving cyclical prospects saw Value outperform Growth for the first time since the December correction.  In our latest note - The Dead Cat Bounce in Aussie Value - we wrote how we thought the Value outperformance would be unsustainable without either continued cyclical improvement or recession.  By the end of the month, the Value outperformance began to wane.  Argentina (18.1%) was the strongest performing market after capital controls designed to restrict dollar access were announced.  However, Japan (5.8%), Korea (4.8%), India (4.1%) and Germany (4.1%) also performed strongly.

Australia (22.6%) and New Zealand (24%) are amongst the strongest performing developed equity markets year-to-date underpinned by their relatively high dividend yield. France (23.7%) and Europe (22.6%,) more broadly, have also performed strongly this year.

Financials (4.1%) benefitted from global curve steepening and Consumer Discretionary (3.0%) benefited from lower domestic interest rates, while Energy caught a bid from the escalation of tensions between Iran and the US. Growth sectors such as Healthcare (-2.5%), and IT (-0.6%) underperformed. The interest rate sensitive Property sector was also under pressure (2.3%) along with Communication Services (-4.2%).  Materials had a strong month led by a rally in commodity prices.

Australia is now expensive, with the earnings bar now lowered to a level more in line with our expectations of 5% (12-months forward) vs 10% at the start of reporting season. However, the think the market is more susceptible to global shocks than other developed markets due to these stretched valuations.  The 12-month forward PE multiple ended the month at 16.6x, which is now 18% above its long-run average.  IT (79%), Healthcare (43%), Industrials (40%) and Communication Services (38%) are most overvalued, with substantial PE premiums to their own history.  Only Materials (-4%) and Energy (-19%) are cheap. 

Consistent with the PE expansion and weakening earnings growth backdrop, consensus EPS estimates show above-average uncertainty in Materials, Financials and IT. Earnings certainty seems better in Consumer Discretionary and Industrials.  Overall, the ASX 200 universe has higher than normal earnings uncertainty.

Retail trade data was weak again in July vs market expectations and GDP in Q2 rose by a tepid 0.5%. However, the increase in the unemployment rate from 5.2% to 5.3% meant that markets fully expected the interest rate cut that occurred this week. The Australian yield curve rose by 3bp to 24bp on the back of the global curve steepening trend.  The RBA left the cash rate unchanged, but the Bank remains locked and loaded to provide more support to the economy.  Australia posted a current account surplus in Q2 for the first time since the early 1970s on the back of strong iron ore prices, a weaker AUD and solid production growth.

SGM was the only stock that lowered guidance, despite the barrage of downgrades across the market.  CBA, AGL, CPU and WES saw the largest number of net downgrades, while FMG, ALL, BPT and NCM saw the largest number of net upgrades.  The 20 stocks with the largest number of upgrades have rallied by an average 22% over the past 6 months vs 1.5% for the 20 stocks with the largest number of downgrades.


Aussie Equities Month in Review       (September 2019)