The Australian equity market experienced a robust performance in September 2024, with the ASX 200 index rising 3% over the month. This outperformance was largely driven by positive developments in China and a shift in U.S. monetary policy.
Key Highlights:
Strong Market Performance: The ASX 200 rose 3% in September, outperforming global equities by 2.8%
China Stimulus Impact: Surprise stimulus announcements from China provided a significant boost to the Australian market, particularly benefiting the mining sector.
Fed Easing Cycle: The start of the Federal Reserve's easing cycle supported lower bond yields, benefiting growth and yield-sensitive sectors.
Sector Performance: Mining (+14.1%) and Technology (+7.2%) were the top-performing sectors, while Healthcare (-3.0%) lagged.
Value vs. Growth: Value outperformed Growth by 3.9 percentage points, driven by the rotation into mining stocks.
Small Cap Outperformance: Small Caps outperformed by 2.3 percentage points, boosted by strong gains in the mining sector.
Commodity Strength: The Bloomberg Commodity Index rose 4.4%, supporting the Australian Dollar which gained 2.2% against the USD.
Monetary Policy Divergence: While the market fully prices in a Fed rate cut in November, expectations for RBA easing remain low.
Sentiment Indicator: The FOMO Meter, a measure of equity sentiment, rebounded to 1.29, indicating elevated risk of a market correction.
Mining Sector Surge
The mining sector was the standout performer in September, surging 14.1%. This remarkable gain was primarily driven by China's surprise stimulus announcements, which caught many investors off guard. Top performers in the sector included:
Mineral Resources (MIN): +29.6%
South32 (S32): +25.6%
Sandfire Resources (SFR): +25.6%
The sector's strong performance came despite a decline in earnings per share (EPS) over the month, indicating that investors are betting on future earnings upgrades resulting from China's stimulus measures.
Technology Sector Momentum
The technology sector continued its strong run, gaining 7.2% in September. This performance was supported by:
Lower bond yields following the Fed's pivot to an easing cycle
Strong earnings momentum, with EPS growth accounting for more than half of the sector's return
Key performers in the tech sector included:
WiseTech Global (WTC): +15.5%
Xero (XRO): +4.6%
Healthcare Sector Challenges
The healthcare sector faced headwinds in September, declining by 3.0%. Despite benefiting from lower bond yields, which led to PE expansion, the sector saw significant EPS downgrades:
Overall sector EPS fell by 8%
Notable declines for CSL, Ramsay Health Care, and Cochlear
The stronger Australian Dollar partly contributed to these earnings downgrades.
Value vs. Growth
September saw a notable outperformance of Value over Growth stocks, with a 3.9 percentage point difference. This was primarily driven by:
The rotation into mining stocks
Weakness in the healthcare sector
This trend contrasts with the U.S. market, where Growth slightly outperformed Value.
Small Cap Strength
Small Cap stocks outperformed their larger counterparts by 2.3 percentage points in September. This outperformance was largely attributed to the strong gains in the mining sector, which has a significantly higher weighting in the Small Cap index compared to the broader market.
Commodity Prices and Currency
The Bloomberg Commodity Index rose 4.4% in September, buoyed by China's stimulus announcements. This strength in commodities, coupled with a relatively hawkish Reserve Bank of Australia (compared to the Fed), helped push the Australian Dollar up 2.2% against the USD.
Monetary Policy Divergence
A notable divergence in monetary policy expectations emerged between Australia and the United States:
The market is pricing in a 100% chance of a Fed rate cut on November 7th
In contrast, there's only a 19% chance priced in for an RBA cut on November 5th
This divergence could have significant implications for currency markets and relative equity market performance in the coming months.
Looking Ahead: The Fear of Missing out and Market Sentiment
Some economists, strategists and commentators are currently suggesting an elevated risk of a market correction in the near term. Investors should be cautious, especially considering that October is historically a volatile month for equities, particularly in the lead-up to a U.S. Presidential Election.
As we enter the final quarter of 2024, investors should remain vigilant and prepared for potential market volatility. While the Australian market has shown resilience and outperformance, global factors such as China's economic trajectory, U.S. monetary policy, and geopolitical events will continue to play crucial roles in shaping market dynamics.
Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.
This communication is based on information from sources believed to be reliable at the time of its preparation (October 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
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