Quarter in Review: June 2023
The June-23 quarter saw volatile performance marked by ongoing macro uncertainty, featuring continued rates volatility, and opposing inflationary drivers. We also observed these macro forces starting to impact company fundamentals, notably catalysing a weaker consumer and continued wage pressures which broadly led to negative EPS revisions over the quarter.
- Global Markets: The ASX300 Accumulation Index was up 1.0% over the quarter, with the Small Ordinaries index down 0.5% continuing its underperformance. The US markets fared better with the S&P500 posting +8.7% and the NASDAQ +13.1% driven by AI mania as the mega tech stocks drove US indices higher despite rising bond yields.
- Sector Performance: There was stark divergence between sector performance over the quarter. The best performing sectors over the quarter included IT (+18.5%), Utilities (+5.5%) and Industrials (+4.3%). Technology stocks outperformed following a rapid rerating off positive US tech earnings and bullish sentiment towards AI. Meanwhile, Utilities outperformed was largely buoyed by an earnings upgrade for AGL. The worst performing sectors were Healthcare (-3.1%), Materials (-2.6%) and Consumer Discretionary (-1.7%). Healthcare performance was largely dragged by a downgrade from CSL, while Materials was weak due to a disappointing China stimulus response, and yuan depreciation highlighting capital outflows. Finally, a number of Consumer Discretionary stocks flagged earnings downgrades over the quarter, highlighting a degrading consumer environment.
- Rate and Yields: Market expectations coming into the June quarter were pricing in a peak in cash rates after an RBA rates pause in April. This pause followed 10 consecutive rate increases prior. However, dovish sentiment was short lived as the RBA surprised the market by hiking in May, and a further hike in June. This marked a tilt towards the idea that inflation, and hence the rates environment would stay higher for longer as core inflation in May stayed steady at 6.4% yoy. While the June inflation print of 5.6% came below expectations, underlying CPI remained resilient, notably with rents up 10.1% yoy. Consequently, the 10-yr materially rose during the quarter by 73bps to 402bps. The US 10-yr rose to a lesser extent by 26bps to 384bps.
- Commodities: Commodity trends were weak over the quarter following soft economic conditions in China. Iron Ore prices declined 10.2% as a reaction to continued sluggishness in China housing sales and bearish commentary from the Chinese steelmakers, with almost half of major steel mills being loss making year to date. The market was further disappointed as hope for a Chinese stimulus response has failed to eventuate. A weaker China outlook also pushed Brent Crude prices 6.1% lower, despite production cuts announced by OPEC that saw some recovery in price in June.
- Corporate News: Corporate activity during the quarter saw chemical distributor Redox raising $402m (~13.8x PER) for its IPO. This leads a number of primary listings touted to come onto market, including gaming products company Light & Wonder, Virgin Airlines, and freight provider, Mondiale VGL. We continue to see foreign takeover bids with Australia seen as a safe harbour to commit capital with a bid for Blackmores by Kirin at $95ps, representing a 24% premium.
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