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'Little room for disappointment' as ASX ends September in the red

Lewis Jackson  |  06 Oct 2021Text size  Decrease  Increase  |  
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Australian stocks posted their first negative month since 2020 this September, joining most global markets in the red as investors grappled with trouble in the Chinese economy and the prospect of a tapering of monetary stimulus.

The Morningstar Australia Index, which tracks the top 97% of ASX-listed stocks by market capitalisation, fell nearly 2% in September. It was joined by the Morningstar US index (-4.8%), Europe (-3.4%), Hong Kong (-6.9%) and China (-5.7%). Japan was an outlier, with stocks up 3.1% as a change in Prime Minister stoked hopes of government stimulus.

It’s the first negative month for the Australian index since September 2020. The US market had posted monthly gains since January.

The pullback came as markets grappled with bad news. Trouble at Chinese property developer Evergrande threatened a slowdown in the world’s second largest economy, even as central banks advanced preparations for reducing stimulus.

The prospect of higher rates added to ongoing inflation worries and sent bond yields higher. The US 10-year note rose 14% in September. The Australian equivalent was up 20%. Tech stocks were among the first victims, with Google, Microsoft, Apple and Facebook down between 6% and 11% for the month.

These risks are clouding the international horizon just as Australia begins to emerge from lockdowns, says Morningstar’s head of equity research, Peter Warnes. While the local economy looks set to rebound, problems overseas can spread to home, especially where China is involved.

“Markets are at levels where just about everything is full on. There’s very little room for disappointment,” he says.

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“Collectively these issues are leading to a risk-off bias and buy the dip has lost some intensity.

“Now markets do climb walls of worry, but you’ve had fair winds for a long time and my gut continues to say bond yields are going to move higher and put pressure on risk asset valuations.”

Putting the dip in perspective

September’s decline follows an otherwise fantastic year for investors. Excluding China and Hong Kong, major markets have delivered double-digit total returns for the year. The Morningstar Australia index has delivered a 15.5% total return since January.

So far, this year’s pullback is mild by historic levels. The -2.38% average drawdown on the ASX this year is the second-lowest in a decade, only slightly behind the -2.16% recorded in 2019. The average drawdown for the US market is also well within its historic range.

Energy rises and metals fall

On the ASX, rising global energy prices helped Australian energy stocks soar even as raw materials clocked a second-month consecutive month of declines.

The Morningstar Australia energy sub-sector rose 14% in September, one of only four sub-sectors to post gains in September. Basic materials fell 8.4% in September, followed by healthcare (-3.7%) and technology (3%)

The big shifts were driven by sharp movements in commodity markets. Brent crude, the global benchmark for oil, rose 9.7% in September. Natural gas prices rose 27.1% while thermal coal soared 40%. In the other direction, iron ore tumbled 16%.

The jump in energy prices revived Australian energy companies. Beach Energy (ASX: BPT), Woodside Petroleum (ASX: WPL) and Whitehaven Coal (ASX: WHC) were three of the top five performers among ASX stocks under Morningstar coverage. Beach rose 38%, Whitehaven 23% and Woodside 21%.

The September turnaround followed double-digit price declines at Beach and Woodside between January and August. All three companies remain undervalued according to Morningstar analysts.

Flight Centre Travel Group (ASX: FLT) was also among the top five performers as reopening hopes solidified. It rose 27% for the month, moving the stock into overvalued territory.

Major miners occupied the other end of the ASX league table, with Fortescue Metals (ASX: FMG) and BHP (ASX: BHP) down 26% and 16%, respectively. Both companies were hit by falling iron ore prices and shares trading ex-dividend.

They were joined at the bottom by steelmaker BlueScope (-18%), fund manager Magellan Financial Group (-19%) and financial services software provider IRESS (-21%).

Fortescue, BHP and Magellan were among the most traded stocks on the ASX in September, according to Sharesight.

Big miners return to fair value in September

The double-digit declines at Fortescue and BHP sent them back into fairly valued territory for the first time in more than a year. FMG was last in this range in October 2019; BHP in October 2020.

The major miners aren’t in 'bargain territory' yet but investors should “watch the space”, says Mat Hodge, Morningstar director of equity research.

Among the firms with the biggest September improvements in their price to value ratio—which measures how under or overvalued a stock is—were insurance brokers Steadfast Group (ASX: SDF) and AUB Group (ASX: AUB), as well as Magellan Financial Group.

The fair value estimate for AUB Group was upgraded 29% to $27 in early September, lifting it into undervalued territory. Steadfast was raised 33% to $5.30. The stock is now trading in a range Morningstar considers fairly valued.

Magellan Financial Group is now trading in the five-star range for the second time in its history. The only other time was during the covid crash in March 2020.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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