Welcome to Morningstar’s market wrap for August 2021. We explore the major market movements at home and abroad and what they mean for Australian investors.

“Risk off” moment in global markets

In August, global markets balanced reassurance from US Federal Reserve Chair Jerome Powell against growth jitters in China and a fall in iron ore. In Australia, listed-companies disclosed their financial results.

The Morningstar indexes for Europe, Japan and the US rose between 1% and 4%. After tumbling mid-month, stocks in China and Hong Kong recovered to end the month roughly where they started. The Morningstar Australia index, which tracks the top 97% of stocks by market capitalisation, ended the month 1% higher.

Jun Bei Liu, a portfolio manager at Tribeca says August was a “risk off” moment for markets. Growth concerns in China combined with ongoing efforts to curb steel production led to a commodity sell off that spread to Australian iron ore miners.

“The world suddenly got worried about growth in China,” she says.

“Miners were sold off despite big dividends, with iron ore falling 20 to 30% in a month.”

Growth worries translated into commodity price volatility. Crude oil prices fell 10% before recovering to their starting point. Iron ore plummeted, hitting $US159 on 31 August after ending July north of $US200.

Elsewhere in August, the rout in Chinese tech stocks showed some signs of slowing. Stocks suffered double digit falls in July due to a regulatory crackdown. Tencent Holdings (00700) added 1.3% in August. Alibaba (BABA) ended lower but not before moving up 5% from its month low in the last two weeks of trading.

Markets got some relief at the end of the month following Powell’s speech at the Jackson Hole symposium on 27 August, says David Bassanese, chief economist at BetaShares.

Powell talked down inflation fears and added that Fed was in no rush to scale back its bond purchases—currently $US80 billion a month—or raise interest rates.

“Markets were apprehensive leading up to the speech and it was a relief that he reiterated his views on inflation and tapering,” says Bassanese.

“The Fed will probably announce tapering later this year but its likely to be quite gradual.”

Yields on 10-year Treasury notes fell modestly after Powell’s comments, ending the month 11% higher at 1.308%. Yields are still 25% down off their March peak, as bond markets pricing inflation to be transitory.

Mining and energy slump, technology soars

Turning to the ASX, volatile commodity prices hurt the mining and energy sectors. The two sectors make up nearly a quarter of the ASX 200.

The Morningstar Australia Energy and Basic Materials indices, which track the performance of those sub sectors of the Australian equity markets, ended down 4% and 8%, respectively.
Despite the sell-off in the resources sector and the continuation of Covid-19 restrictions, the overall market proved resilient says Bassanese.

“Lockdowns have gone from bad to worse but what’s remarkable is that the market has looked through that,” he says.

“Markets have learnt to look through Covid. That the disruption to growth should be relatively temporary.”

The market was helped across the finish line by the Technology sector, up 10% in August. Technology was boosted by Square-Afterpay tie up and strong end of year reports from companies such as WiseTech Global (ASX: WTC).

Reporting season reshuffles the ASX

Reporting season has come and gone. A peek into the corporate accounts and turmoil in commodity markets has reshuffled the ASX, with flagship miners falling while names like Blackmores and Dominos soared.

WiseTech Global was one of the best performing stocks for August, up 52% after smashing earnings expectations. It is now under review pending a change to fair value. It was joined by theme park owner Ardent Leisure Group (ASX: ALG), which jumped 54% as investors bet its US assets would benefit from reopening.

Morningstar director of equity research Brian Hand raised the fair value for Ardent by 33% to $0.80 as he raised his earnings forecast. The stock trades at a 75% premium to fair value.

Narrow-moat Blackmores (ASX: BKL) soared 36% after it reported cost reductions were on track amid a pickup in international sales. It trades in a range Morningstar considers fairly valued.

The strong earnings growth that characterised FY21 is likely to slow, says Morningstar head of equity research Peter Warnes. Corporate profits minus the mining sector declined in the June quarter.

“Analysts have been downgrading FY22 forecasts through the reporting season as the reality of weaker earnings growth becomes increasingly apparent,” he says.

Miners crowded the other end of league tables. Despite splashing tens of billions in dividends, the major miners all suffered double digit slumps in August. Fortescue Metals Group (ASX: FMG) fell 14%, BHP (ASX: BHP) fell 15% and Rio Tinto (ASX: RIO) was down 16%.

The three miners ended the month an average of 19% off their 52-week highs, set the month before.

Another big-name stumble was Magellan Financial Group (ASX: MFG). The stock fell 14% in August as profits fell and fund outflows continued. It was down 33% from its October 2020 high.

Big improvements to fair value

Upgrades to fair value and price declines have pushed several names back into fairly valued territory.

Morningstar equity strategist Gareth James raised the fair value for IRESS (ASX: IRE) 33% following takeover interest from Swedish private equity firm EQT. The stock is now trading in a range Morningstar considers to be fairly valued.

The fair value for Afterpay (ASX: APT) rose 51% following the proposed merger with Square and the stock is now trading at three stars.

Thanks to the August share price fall, BHP is now trading in a range Morningstar considers to be fairly valued for the first time since October 2020.

At the other end, Santos (ASX: STO), Link Administration (ASX: LNK) and G8 Education (ASX: GEM) are still trading in ranges considered to be undervalued following cuts to fair value between 6% and 9%.

Looking at September, Liu is optimistic global growth will continue as increasing vaccination rates outweigh concerns about Delta.

“We’ve heard from corporates that the US recovery is very strong,” she says.

“The recovery remains on track. Delta is a bit of a speed bump.”