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ASX.Express Weekly Round Up Inside the market

Banks, Consumer, Tech diverge

Banks, consumer discretionary and tech traded in tandem into the March 23 low. However, since that time, consumer and especially tech have bounced substantially, while banks have barely moved. I’m looking at these three sectors together because together they represent the more cyclical exposures in the market. These are the companies most exposed to the health of the underlying economy.  

So what’s happening under the hood and what is the reason for the divergence?

Banks

Looking at the banks, the big four, in particular, have suffered severe drawdowns during March and hardly recovered at all during April. NAB, WBC and ANZ are all languishing very close to their GFC lows, which is extraordinary. They’ve all essentially traded sideways for the last ten years. CBA, on the other hand, was able to put in a much more robust recovery out of the GFC but has also broken below a long term trading range and is currently sitting at levels last seen in 2010.

At the GFC low, the big four banks traded at around one times book value. This multiple was down from extravagant levels before the GFC of between 2.5 and 4 times book value. They then made their way back to the 2-3x level at their post-GFC highs in 2015. WBC, ANZ and NAB have now crashed to between 0.7-0.8 times book value. CBA has collapsed to a low of 1.24x.

From this, I can only surmise that the market is expecting significant damage to bank balance sheets and profitability in the coming months. 

Consumer Discretionary

Consumer discretionary stocks fell in tandem with the banking stocks at the onset of the current crisis, however, rebounded much more strongly in April. This action is in contrast to how they behaved during the GFC, where there was significant underperformance from the consumer sector. The banks also recovered faster coming out of the GFC.

Taking a look at some of the big caps in the sector:

And some of the smaller caps:

Both groups have shown strong bounces in April in contrast with the banking stocks. 

Information Technology

Technology stocks also fell in tandem with the banking and consumer discretionary sectors, however, recovered a large portion of the decline in April. By the end of April, the sector average was down only approximately 8%, after having been down 42% when it bottomed out on March 23. 

The strength of the bounce in technology stocks is not as surprising as the strength in the retailers. This behaviour is more in line with historical precedent. However, we are wary of discounting big techs exposure to the consumer, small business and the economy in general. These companies will struggle alongside everyone else in the event of a significant economic contraction. 

The top five largest technology stocks by market capitalisation, which account for more than half of the entire technology index include Xero, Afterpay, Computershare, Wisetech and Altium. Each has exposure to the underlying economy, and each will find growth harder to come by in the event of a system-wide contraction. 

Xero’s stock price has recovered to within 15% of 52-week highs. Afterpay is flirting with new highs today, following news of Tencent’s new 5% stake in the company. Neither of these companies will be immune in the event of a recession. 

Xero’s customers are the small businesses most exposed to this crisis. Volume growth in Afterpays consumer payments business is sure to slow in the event of a recession, not to mention the potential credit exposure from customers who’ve lost jobs and are unable to make repayments.

Summing up

This piece is not a prediction of the future. I’m merely pointing out the growing divergence between the banking stocks and some of the other cyclically exposed stocks. 

The banks are telling one story, while the consumer discretionary and technology stocks are saying something else entirely. Both have exposure to similar risks in varying degrees.

The banks have told us more. ANZ, NAB and WBC have each reported half-yearly results in the last week or two. Each set of results included hefty credit impairment charges and a deep sense of concern for what to expect in the months ahead. This concern is being reflected in their share prices, while other cyclically exposed stocks are currently reflecting hope.

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Inside the market

Large cap stocks on the move

The All Ordinaries is back within striking distance of all-time highs, adding 0.9% during the week ending 20 September 2019. All industry groups participated in the gains. However, ultimately, the big miners and banks dictate index performance, and they have been on the up.

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The Energy sector was the most significant contributor to performance during the week. Consumer Staples sector was next, helped along by the surprise bid to buy Bellamy’s (BAL) pitched at a 59% premium.

Energy

Large capitalisation stocks in the Energy industry drove the sector higher last week. Despite last week’s uptick, Energy is still the worst performing over the previous 12 months, six months and year-to-date.

The sector index is struggling to break it’s way back into the trading range that it’s found itself in for most of 2019. As can be seen below the sector has made no progress since early 2018.

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Only five stocks included in the S&P ASX 200 Energy index have managed positive returns over the last 12 month period. Of these, only three are within 10% of 52-week highs.

Santos (STO), Beach Energy (BPT) and Cooper Energy (COE) have been the standout stocks in the sector over the last 6 and 12 months. The charts of STO and BPT look remarkably similar. Each shows a breakout in the previous few weeks to new highs on a substantial increase in volume.

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COE has been in a strong uptrend since the beginning of 2018.

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The coal group including Washington H. Soul Pattinson (SOL), Yancoal (YAL), Whitehaven (WHC) and New Hope (NHC) are all trading substantially below their highs and down over the last 6 and 12 months.

Woodside (WPL) and Oil Search (OSH) both had active weeks, last week on the back of the spike in the oil price. However, both stocks remain ~18% below 52-week highs and down close to 10% each for the last 12 months.

Financials

The Financials sector index has steadily travelled since the beginning of 2019 from the bottom of its range up towards the top. The index has been in this range since late 2013.

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Large capitalisation stocks have been the primary drivers of the move this year – CBA, WBC, NAB, ANZ and MQG are all up over the last 12 months and all within 5% of 52-week highs.

The large insurers have similarly exhibited strong performance over the last 12 months. Each of the majors, including Suncorp (SUN), IAG and QBE, have contributed positive return to the sector in the previous 12 months. Moreover, each is now within 10% of 52-week highs.

Interestingly, only IAG has been able to able to make new highs since the GFC. Both SUN and QBE are still well below their pre-GFC peaks, and both have virtually gone nowhere since 2013.

NIB and Medibank have been the standouts of this group. Both were helped along by the Coalitions reelection, and each is up more than 30% in the last six months.

The other group worthy of some commentary here are the fund managers.

Magellan (MFG) is the only one to have defied the gloom heaped on the industry. MFG is up close to 100% over the last 12 months while AMP, Janus Henderson, Platinum, IOOF, Pendal and Perpetual are each down between 7% and 41%. Regulation is taking its toll on the sector as well as the flight from active to passive.

Magellan has built a marketing machine more than anything else over the last ten years. Their prowess in sales and marketing, along with the great bull market in equities have allowed them to continue growing at breakneck speed while the others have floundered.

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Inside the market

Consumer Discretionary showing it’s not all doom and gloom

The All Ordinaries index continued its advance during the week ending 26 July 2019 adding another +1.37% for the week. The index is now more than 10% above its 200 DMA. Approximately 63% and 64% of constituent stocks are above their 200 DMA and 100 DMA respectively. 

During the week 67% of stocks advanced. The week ended with two hundred and seventy-nine shares within 20% of their 52-week highs. 111 of those were within 5% of 52-week highs. As we’ve said in the past, more stocks making new highs is an excellent sign of the strength of the market as a whole.

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Inside the market

Gold higher, Health Care advance broadening

The All Ordinaries index put in another solid week with a performance of +1.52% which was a follow-through from the prior week’s breakout. Strong appreciation in the Energy, Information Technology and Industrials sectors drove the robust result. All sector indices contributed positive performance for the week except the Communications sector, which fell 1.85% driven in part by Vocus Group (VOC), whose shares fell 26.6% as a result of AGL’s withdrawal of their bid for the company.

Of the 489 stocks currently comprising the index (and for which we collect data), 275 of these (56%) ended the week above their respective 100 DMAs. Three hundred and four stocks were up for the week, while 185 ended the week flat or down. Two hundred and fifty-one shares finished the week within 20% of their 52-week highs, with 110 of those within 5% of 52-week highs, which is the highest this number has been for some time. As we’ve said in the past, more stocks making new highs is a powerful sign of the strength of the market as a whole.

Consumer Dicretionary

Despite all sector indices bar Communications being positive for the week, the average of all Consumer Discretionary stocks in the All Ordinaries index was negative. The more significant capitalisation names such as Wesfarmers (WES) and Aristocrat (ALL) were positive for the week, which kept the index positive. However, beneath the surface, there was widespread weakness in the sector, and there are only five stocks (or 10%) in the industry within 5% of new highs, and two of these are funeral providers. This lack of depth does not portend well for the sector.

Energy

The Energy sector staged something of a recovery last week with the sector index rallying 3.1%, bringing it back into the trading range that began in February this year. Last week we noted that the sector attempted to push back above resistance, and into the trading range; however, the resistance level held and stocks sold down lower.

On this second attempt, the index was able to work its way back into the trading range. This last few weeks spent below the support level might prove to have been a shakeout for the sector before it begins to move higher again. Time will tell.

The heavyweights of the sector including Woodside (WPL) and Santos (STO) look particularly strong, along with Cooper Energy (COE), however again, below the surface the sector does not look particularly like it is under any widespread accumulation. There are only two stocks (or 6%) that are within 5% of new highs, and they are STO and COE. WPL is 6% from its highs.

The average of the other 20 Energy stocks included in the All Ordinaries is 41% below 52-week highs. For the advance to be sustainable, it’s imperative that it becomes more widespread amongst the smaller names.

Health Care

The Health Care sector also provided some fascinating action during the week. The Health Care Sector Index was mostly flat for the week, however below the surface, the average stock was up 2.5%. The discrepancy in the performance of the big cap stocks versus the mid-cap leaders is what caused this phenomenon.

While the large-cap stocks drove the previous weeks advance, this week all the heavy lifting was done by the smaller names, which indicates a sector under accumulation.

Of particular note were breakouts by Nanosonics (NAN), Clinuvel (CUV) and Polynova (PNV). Each of these stocks had been resting for various numbers of weeks, but last week each was able to make significant progress.

Gold

Gold continued its substantial advance during the week, and a number of the sector leaders, including Newcrest (NCM), Northernstar (NST) and Silverlake (SLK) reflected this. The strength in AUD gold is a reflection of both the weakness of the AUD and the underlying demand for gold.

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Inside the market

Broad Industrial advance notable

The All Ordinaries index continued its upward trajectory during the week ending 14 June 2019, rising another 1.66% taking it to levels not seen since 2007. The Materials sector led stocks higher with the S&P/ASX 200 Materials Sector Index increasing 5.2%, followed by the Communications Services sector and the Healthcare sector, each advancing more than 3%.

Of the 489 stocks currently comprising the index (and for which we collect data), 266 of these (54%) ended the week above their respective 100 DMAs. Three hundred and ten stocks were up for the week, while 179 ended the week flat or down. Two hundred and forty-seven shares finished the week within 20% of their 52-week highs, with 100 of those within 5% of 52-week highs.

The Energy sector attempted to push back above resistance, and into the trading range which began in February 2019 however the resistance held and energy stocks were sold lower, confirming the weakness of the sector as a whole.

Consumer Discretionary stocks attempted to break out above their trading range. However, the trading range held with participants coming into the market and driving shares in the sector back down.

There are some solid stocks in the sector such as Aristocrat Leisure (ALL), Harvey Norman (HVN), IDP Education (IEL), Invocare (IVC), Jumbo Interactive (JIN) and Collins Foods (CKF).

However not enough of them to take the sector as a whole to new highs, especially as the heavyweight, Wesfarmers (WES) has begun to break down after attempting to overcome resistance and move higher.  

Communication Services

The Communications Services sector is an interesting one to look at because, while S&P/ASX 200 Communication Services sector index has been on a tear recently, the average of the stocks that comprise the sector has been much less impressive. The reason for this, of course, is Telstra (TLS).

As goes Telstra, so goes the rest of the Communication Services index. A glance at the charts confirms this view. One looks almost indistinguishable from the other.

Looking below the surface, the only other stocks of interest in this sector at the moment are REA Group (REA) and Chorus (CNU).

REA has shown considerable strength in the last couple of months and is now back very close to new highs. If the stock can overcome resistance at this level, it might be able to resume its uptrend. However, the stock might need some time moving sideways in a trading range while the market works through the supply, before it is ready for this next move up.

Chorus has been one of the star performers over the last 12 months. It now appears to be consolidating this strength and forming a trading range. At this stage, the timing and direction of the next move are distinctly unclear; however, how the stock behaves over the next few weeks will give us some clues.

Industrials

In contrast to the Communication sector, we note that 31% of Industrial companies are now within 5% of new 52-week highs. Only the Real Estate sector and the Utilities sector have a higher proportion of stocks within 5% of new highs at 50% and 63% respectively. The industrial sector has made steady progress this year since breaking out of a trading range that it had been in since June 2017.

Leaders in the sector include Austal Limited (ASB), Service Stream (SSM), AMA Group (AMA), Nearmap (NEA), Monadelphous Group (MND) and Cleanaway Waste (CWY). Each of these stocks is within 5% of new highs and as a group they have been under accumulation.