February’s market rout the cold shower needed to return to reality
The poor performance was not solely about corporate hits and misses and could be a sign of things to come as economic uncertainty and inflation persists.
The month of February may have set the tone for the rest of the year.
It was the proverbial cold shower that brought back some realism into what appeared a lot of exuberance that previously underpinned January’s strong rally.
Over the month of January the market moved higher by 6.20 per cent, but last month it drifted lower by 2.45 per cent (in terms of total return). February’s negative performance was never going to be solely about corporate hits and misses, of course, with global bond markets and inflation forecasts equally making an impact.
Over the month shareholder compensation came through via oil and gas producers, coal producers and insurers, but still, on CommSec’s calculations, some 20 per cent of companies lowered their dividend in February.
Twenty per cent means one in five, which is probably a better indication of how tough the general on-the-ground experiences are for corporate Australia. In aggregate, EPS forecasts for the ASX 200 only fell by less than -1 per cent in February, but Macquarie analysts point out estimates have now fallen by -7 per cent on average from their peak in 2022.
On FNArena‘s assessment, more companies (32.5 per cent) missed and disappointed in February than those who beat and surprised positively (29.5 per cent). When put in historical context it is quite rare to see the larger percentage held by the negative. In all the February results seasons since 2014, this had not happened prior.
One standout observation this year is that investors were much less prepared to grant companies the benefit of the doubt, which also has been one major contributor to February‘s negative performance. Simply reporting in line and sticking with prior guidance still caused share prices to retreat slightly, according to Morgan Stanley’s data analysis.
The strong rally off the October lows required companies to outperform forecasts, but those who managed to do it were only rewarded with an average share price gain of 2 per cent. Those who missed, on the other hand, got punished on average by close to -10 per cent.
Most market analysts have now pared back average EPS growth for this year, as well as the two following years, below Australia’s long-term average of 5.5 per cent, but at face value numbers are dependent on forecasts for the ever so volatile miners and energy companies.
Regardless, an oft-repeated factor among those with a more cautious outlook is that EPS forecasts in Australia, as well as in the US, most likely remain in a downtrend for longer, which makes it difficult to see a sustained bull market for equities on the horizon.
Another standout observation from February is that large cap companies are performing (much) better than their smaller cap competitors. One need not look any further than the 44 ASX 50 reporters in February of whom nearly 41 per cent surprised positively and only 29.5 per cent fell short.
For the 159 reporters from the ASX 200 (also including those 44) the numbers are respectively 28.3 per cent beats and 33.3 per cent misses.
Two market segments defied negative forecasts in February: consumer spending oriented companies, led by discretionary retailers, and real estate investment trusts (AREITs).
Property values have held up even in the face of aggressive tightening by the RBA and central bank peers globally, and analysts are not quite sure what to make of it. Many local REITs carry a lot of debt, so there’s a growing headwind through servicing this debt, while new financing facilities are becoming more costly too.
Sector pressures are expected to remain negative for owners of office buildings while consumer spending, or its outlook, keeps a question mark over others.
Citi’s team of property sector analysts believe companies and trusts able to grow income will enjoy valuation support. They prefer Goodman Group, Region Group, Charter Hall Retail REIT and Abacus Property.
Macquarie’s preferences among AREITs include Dexus, GPT, Goodman Group, Arena REIT, HomeCo Daily Needs REIT, Dexus Industria REIT and Qualitas.
Retailers and consumer companies performed each way in February, also illustrated by the fact that GUD Holdings, Flight Centre and Eagers Automotive were among the month’s best performers on the ASX, while Domino’s Pizza, Temple & Webster and City Chic Collective were among the worst performers.
Recent analysis by ANZ economists suggests Australian households are not so much reducing their spending as they are redirecting it between discretionary categories. Entertainment and travel are “hot” while non-food retail is weak, and weakening. In line with most forecasts out there, the economists are still bracing for ”material impact” from RBA tightening later in the year.
The fixed-rate mortgage roll-off everybody has been talking about for more than a year will only genuinely start rolling off from April onwards.
Meanwhile, research by Roy Morgan suggests an estimated 1.19 million mortgage holders, circa 24.9 per cent, were at risk of mortgage stress in the final three months of last year. That number is the highest for over a decade since June 2012 and is now significantly above the long-term average of 22.8 per cent stretching back to early 2007.
Stockbroker Morgans has selected CSL, Endeavour Group, Lovisa, Qantas Airways, QBE Insurance, Tourism Holdings, Ventia Services, and Wesfarmers as its Best Ideas from the reporting season just past.
PAC Partners’ Bannan has selected Ive Group, Shine Justice, Codan and SG Fleet.
Macquarie analysts report sector winners are insurers, staples retail and packaging – all are defensive sectors in which the broker’s portfolio has an overweight allocation. The worst sectors in reporting season turned out to be energy, consumer services, media and capital goods.
Not one single company in each of the latter four baskets enjoyed material EPS upgrades, reports Macquarie.
Morgan Stanley’s quant team probably captures the conclusion that high quality stocks are now outperforming their low quality brethren on the ASX for a third month in succession.
Rudi Filapek-Vandyck is editor of the sharemarket research service FN Arena
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