Buoyant investor sentiment
One of the grand themes dominating May was an earlier than expected re-opening of the Australian economy (with restrictions easing in other parts of the world as well) with signs the damage to economies and corporate profits was not as severe as feared.
The other factor feeding general optimism was a continuation of the unprecedented stimulus measures by governments across the globe.
Combined, these factors built a solid foundation under investor confidence.
May ended with the ASX200 at 5755.7, 4.2% higher than the previous month. It even broke through Morgan Stanley’s year-end target of 5,800 on May 28th, when the index ended the day at 5,851 – its highest level since peak crisis.
If seen in US dollar terms, the ASX200 was one of the best performing developed market indices, second only to Japan’s Nikkei 225 (which rose 7.5% month-on-month).
Overall, the index has gained 28.3% since March 23rd although it still remains well below February’s record high of 7162.5.
Globally, Argentina was the strongest performing market, rising 19.8% month-on-month while the S&P500 soared 4.8% over the month. The MSCI ACWI (All Country World Index), which tracks equity market performance throughout the world, was up 4.1%.
Developed markets outshone emerging markets by 4% and globally, IT generated the strongest gains at 7.5%, followed by materials at 6.3%, while energy languished at the bottom rising only 0.5%.
Information Technology: leading the way
IT equally outperformed domestically, up 14.5%, followed by communications, materials, resources and consumer discretionary. Most of the sectors ended the month in the green except for healthcare (-5.3%) and consumer staples (-0.4%).
The strategy team at Morgan Stanley notes sectors that contributed the most to the ASX200’s total performance were materials and financials, adding 1.59 % and 1.27% to the index while healthcare undermined its performance by -0.69%. In terms of individual stocks, BHP Group ((BHP)) was the biggest contributor while CSL ((CSL)) finished at the bottom.
Best performing stocks in the ASX100 were Afterpay ((APT)), Charter Hall Group ((CHC)) and Qube Holdings ((QUB)) while the losers include Incitec Pivot ((IPL)), Alumina ((AWC)) and Unibail-Rodamco Westfield ((URW)).
Small caps have outperformed large caps by 20% since the onset of the crisis, highlights the Morgan Stanley team. This trend continued in May with small caps surging ahead of their larger peers by 6.74%. Here, IVE Group ((IGL)), Southern Cross Media ((SXL)) and Eclipx Group ((ECX)) did well, while Select Harvests ((SHV)), Freedom Food Group ((FNP)) and New Hope Corp ((NHC)) lagged.
JP Morgan analysts note the Australian rebound has been led by cyclicals but believe this is unlikely to continue unless there is an acceleration in the economic re-opening with activity really picking up.
Going forward, they have adopted a conservative stance, adding more of telecommunication, staples, healthcare and utilities while shifting away from financials, industrials and REITs.
Earnings and Capital raisings
Earnings will need to grow by 32% to reach the high P/E levels seen in February, calculate JP Morgan analysts, although on a slightly positive note, May saw less reduction in earnings estimates with the average forecast for the ASX200 falling by only -2.8%.
Morgan Stanley analysts, who earlier predicted a fall in earnings up to -20%, expect more news on this as we get closer to June 30 with companies updating market expectations before results.
A decrease in dividends was a prominent theme throughout May with many companies cancelling, deferring or slashing their interim distribution, including Westfield, Orica ((ORI)) and Westpac ((WBC)). Macquarie Group ((MQG)) reduced its final dividend by half.
Overall, the ASX200 has seen dividends cut by -27.3% year-to-date, mostly concentrated in energy, financials and industrials.
This may look huge against Nasdaq’s cut of -1% year-to-date but JP Morgan analysts point out the local index has the world’s highest dividend payout ratio and consequently the fall, while disappointing, is not unexpected.
The capital raising spree continued in May, albeit at a slower pace, as companies across sectors looked to shore up liquidity. The list includes Atlas Arteria ((ALX)), Blackmores ((BKL)), Incitec Pivot, Mesoblast ((MSB)), National Storage REIT ((NSR)), and United Malt ((UMG)).
Most raisings aimed to strengthen balance sheets, maintain ample liquidity and, in some cases, prepare for potential acquisition opportunities.
Commodities: Reaching new highs
Every major commodity rose in May, except for thermal coal which fell -0.7%.
Iron ore breached the US$100/t level with a 21% rise on the back of robust demand coupled with supply bottlenecks in Brazil. This is expected to cease with analysts expecting a fall in price to US$78/t by the end of the third quarter.
Copper is expected to be at US$4600/t while gold will likely reach US$1765/oz by the end of the second quarter.
Crude oil continued to soar with WTI surging 62% on account of an increasingly optimistic growth outlook combined with a lower US dollar. JP Morgan analysts expect Brent to end the second quarter at US$58.25/bbl.
Mixed economic indicators
The JPM Global Manufacturing PMI rose 6.7 points in May with consumer goods manufacturing reporting the largest increase at 41.4. In fact, Japan was the only index that fell in the month while China reported a higher than expected increase.
Going forward, JP Morgan analysts expect Australia’s GDP to drop -33.5% in the second quarter while unemployment is projected to rise to 11%. How the situation unfolds will depend a lot on consumption, warn the analysts, but here too they forecast household income to contract -23% in the June quarter.
Other economic parameters are a tad more positive, for example the ANZ Roy Morgan consumer confidence survey, which showed consumer confidence recovering for the eighth consecutive week. This puts the May figure at 92.7, up 3.6%, after falling to its lowest point during the last week of March at 65.3.
Business sentiment remains tepid with NAB business conditions declining to -34.1 in April from -22 in March, while business confidence is still very weak. JPMorgan analysts note bleak trading conditions with a decline in forward orders and falling capacity utilization.