Value stocks back in vogue as ASX 200 surges

Surging value stocks drove a strong rise in Australian shares on Tuesday as expectations of a cyclical recovery rose.

The Australian market has bounced 31 per cent from its March low. Picture: Getty Images

Surging value stocks drove a strong rise in Australian shares on Tuesday as expectations of a cyclical recovery were bolstered by a further easing of coronavirus restrictions in key trading partners.

The benchmark S&P/ASX 200 rose 164 points, or 2.9 per cent, to an 11-week high of 5780 points — adding $50bn worth of market capitalisation, including almost $9bn at the close.

Real estate, financials, communications, consumer discretionary and energy stocks led gains amid a focus on value, while utilities, consumer staples, mat­erials, industrials, technology and healthcare stocks lagged behind as investors switched away from growth, momentum and defensive plays.

Among the strongest stocks, shopping mall operator Unibail-Rodamco-Westfield surged 13 per cent, Westpac rose 6.3 per cent, Flight Centre rose 11 per cent, SmartGroup jumped 13 per cent, Harvey Norman rose 6.2 per cent and Whitehaven Coal gained 5.4 per cent.

But some stocks that outperformed during the recent recovery from the coronavirus sell-off in February-March lagged the frontrunners, with Afterpay up a more modest 1.3 per cent, ResMed up 0.6 per cent, Transurban up 0.7 per cent, Fortescue Metals down 0.4 per cent and AusNet Services off 0.3 per cent.

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Tuesday’s rise was the biggest since April 9. After rising 2.2 per cent on Monday, the ASX 200 is up 5 per cent for the week, having achieved its best two-day rise in six weeks.

Bell Potter’s head of institutional sales and trading, Richard Coppleson, said the fact that a “massive” $9.26bn of shares and 99 block trades worth a “huge” $914m traded “was something that really stood out and spoke volumes about today”.

“Ninety per cent of the time when the US is closed we trade very low volumes — but today’s were truly exceptional on a day when the market rallied almost 3 per cent in one day,” he said.

“That tells me that some institutional investors have had internal meetings and realised that their big cash positions were destroying their performance in May and that, with nothing but good news here and in the US and Europe, they could no longer hold out.

“Many will remain in cash, but there has finally been some ­capitulation by some.”

The index is still down 14 per cent for the year to date after rising 18 per cent in 2019.

The gains came as S&P 500 ­futures rose as much as 2 per cent, suggesting the US benchmark would open at a three-month high above 3000 points when trading resumed overnight after the Memorial Day long weekend, while FTSE 100 futures pointed to a 2.3 per cent rise in the UK.

The S&P 500 faces an important test of resistance from its downward-sloping 200-day moving average — widely watched as an indicator of the medium-term trend — at 3000 points.

Germany’s DAX index rose 2.9 per cent on Monday as business expectations rose more than expected, while the Nikkei 225 in Japan, which ended a state of emergency on Tuesday, jumped 2.6 per cent.

The Hang Seng in Hong Kong rose 2 per cent, despite increasing tensions over China’s proposed new security laws. China’s Shanghai Composite rose 1 per cent and Korea’s KOSPI rose 1.8 per cent.

The dollar latched onto the “risk-on” mood in global markets, rising half a US cent, or 0.8 per cent, to US65.96c, near its highest point since early March.

But commodity prices were mixed. West Texas crude oil ­futures jumped 3.5 per cent to $US34.41 a barrel and LME copper futures rose 1.3 per cent to $US2.439 a pound, while Dalian iron ore futures were down 3 per cent at 698.5 yuan per tonne.

After falling as much as 39 per cent from a record high of 7197.2 in February to a seven-year low of 4402.5 in March, in what proved to be one of its fastest and shortest bear markets in history, the Australian market is firmly back in a bull market, having bounced 31 per cent from the low.

RBC Capital Markets head of equities Karen Jorritsma cautioned that the market was operating in an “information vacuum” in terms of the outlook for corporate earnings and dividends.

“Months out from reporting season and with plenty of noisy and backward-looking headline data, we don’t have much to hold onto, except hope,” she said.

Value stocks as a group — those trading at low prices relative to book value or earnings per share — neared their deepest relative performance gap versus growth stocks this month.

“Dividend, value and leverage factors (are) all in the green and growth and momentum in the red,” Morgan Stanley Australia equity strategist Chris Nicol said.

“Banks, energy and real estate are all strong within value factors.”

Mr Nicol noted that eurozone “tail risks” had diminished because of the French-German proposal for a €500bn ($830bn) recovery fund financed by joint debt issuance and distributed as grants, China had a “significant (budget) deficit” narrative, which would support cyclical exposures particularly in the materials and resources sectors, and the US economy was reopening after lockdowns.

“More assured signs of a robust recovery will be needed to see sustained value outperformance … (but) given the extent of underperformance, we think some value exposure is warranted from a risk mitigation perspective,” he said.

Morgan Stanley’s pick of stocks for both value and quality includes Fortescue, Coca-Cola Amatil, BHP, Harvey Norman, Rio Tinto, Ansell, Sandfire Resources, Super Retail Group, SmartGroup and AGL.