The S&P/ASX 200 Accumulation Index returned 2.4% during the month. Global equity markets continued to rally hard in April, with the Australian market a laggard amongst its developed peers. Developed markets outperformed emerging markets. In major global developed markets, the Euro Stoxx 50 was the strongest market returning 5.5%, Japan’s Nikkei 225 was up 5.0% followed by the S&P 500 at 4.0%. The UK’s FTSE 100 brought up the rear returning 2.3%.
The cash rate remained unchanged in April at 1.50%. The Reserve Bank of Australia (RBA) has shifted to a more dovish tone, noting that if inflation did not move any higher and unemployment trended up, a decrease in the cash rate would likely be appropriate.
The latest domestic economic data releases were mixed in April. The Commonwealth Budget was delivered early in the month, largely delivering on expectations, with a return to surplus forecast in 2019/20 of AUD 7.1 billion. The inflation result was lower than expected, with the Q1 headline CPI flat for the quarter. Employment growth rose a larger than expected 26,000 positions in March, but the unemployment rate ticked up to 5.0%. The NAB Business Conditions Index rebounded 3 points to +7 in March, while Business Confidence fell a further 2 points to zero. Residential building approvals for February rose a larger than expected 19.1%, with higher density approvals spiking 62%. Year-on-year approvals remain negative at -12.5%. National CoreLogic dwelling prices continued their fall, with April down 0.5%. This sees the year-on-year decline at -7.2%, the lowest since February 2009. Retail sales were up 0.8% in February, the largest monthly gain in over a year.
In company specific news, Dulux group agreed to an AUD 3.8 billion takeover by Japanese firm Nippon Paint. This saw the company’s share price rise ~32% over the month. Woolworths announced an AUD 1.7 billion off-market buyback following the sale of its Petrol division to EG Group.
Sector returns were mostly positive during April. The best performing sector was Consumer Staples (7.3%), along with Information Technology (7.3%). Other sectors posting positive returns included Consumer Discretionary (5.0%), Financials (4.4%), Industrials (2.8%), Healthcare (2.8%), Communications (2.4%) and Energy (1.5%). Materials (-2.0%) was the worst performing sector for April, with Real Estate (-1.9%) and Utilities (-0.5%) also posting negative returns.
The Consumer Staples sector was the strongest performer in April largely driven by A2 Milk (17.2%) and Treasury Wine Estates (15.2%) which both benefitted from improved growth in China. Woolworths (4.8%) was also a key driver of sector performance following its announcement of an off-market share buyback.
The Information Technology sector performed strongly locally and also globally during April. Afterpay Touch (22.1%), Xero (11.9%) and Computershare (4.4%) were the main contributors to the sector.
The Consumer Discretionary sector also outperformed the market. Sector heavyweights Aristocrat Leisure (6.4%) and Wesfarmers (3.9%) were the key contributors to performance. Aristocrat outperformed for the month as the latest industry data suggested that Aristocrat continues to take market share in US land based slot machines.
The Utilities sector underperformed the market with APA Group (-3.6%) the key driver behind the underperformance.
The strong run enjoyed by the Real Estate sector came to a halt in April with the sector being one of the worst performers during the month. Scentre Group (-7.1%) and GPT Group (-7.7%) were the largest detractors from sector performance.
The Materials sector was the largest underperformer during the month. This was due to weak returns from the miners, notably BHP (-2.8%), South32 (-10.5%) and Rio Tinto (-2.6%). Despite a small increase in iron ore prices, much of the mining sector suffered a pull back after a strong start to the calendar year.
Global economic expansion is continuing however there has been some divergence in relative growth rates in recent months with a slowdown in China, Europe and Japan. While US economic activity remains buoyant, growth momentum is flattening.
While the market sell-off in late 2018 was disappointing, with already cheap cyclical stocks further sold-off, we continue to believe that the accommodative financial conditions in most advanced economies and additional stimulus in China (which is starting to take effect) will support the global economy in the medium term.
In Australia, the RBA has lowered the 2019 growth outlook to 2.75%, though the economy still remains in relatively good health with the labour market still strong. As well as high levels of Government-funded infrastructure investment, the RBA have previously noted that business conditions remain favourable and that non-mining business investment is expected to increase. The much publicised correction in Sydney and Melbourne house prices is the result of both tightening credit supply and lower credit demand. Importantly, the price declines are not a function of household financial stress and low mortgage interest rates remain supportive of household budgets. Anticipated cuts in the cash rate will provide further support.
The divergence between value and growth stocks has been widening over the last five years and has certainly picked up over the past 12 months. During the most recent sell-off, both growth stocks and value stocks fell, with a significant rotation to defensive, low volatility and quality stocks. In our view, these stocks were already priced in “bubble territory.” Despite the correction in growth stocks, they are still trading well above the 25-year average. Typically, value stocks outperform when bond yields are rising as they tend to be more sensitive to better economic conditions. The relationship broke down recently as rising bond yields in the US have resulted in the market becoming overly concerned over inflation and thus both value and growth stocks corrected. The tempering view from the US Federal Reserve, together with easing trade tensions, should see underlying fundamentals becoming the primary driver of markets rather than fear. However, the flatter yield curve in the US has invoked fears of a recession and risk aversion remains heightened.
The heavily stretched valuation gap between value and defensive, low volatility stocks implies the market is pricing in either a recession or further deflation. Given our view is that neither is likely in the short to medium term, we believe this continues to provide an attractive entry for rotation into extremely cheap, economically-sensitive cyclicals.