Quarter in Review: March 2023
The March 23 quarter saw the ASX300 Accumulation Index returning 3.3%, with large caps outperforming the Small Ordinaries Index which returned 1.9%. The quarter was dominated by the US regional banking crisis, rising interest rates and reporting season.
The key drivers of the market were:
- Sector Performance: The best performing sectors for the quarter were Consumer Discretionary (+11.4%), Communication Services (+10.3%) and Materials (+8.2%). The worst performing sectors were Financials (-2.3%), Real Estate (+0.0%) and Energy (+0.6%). While the top sector performers were relatively consistent over the past 3 months, underperformance of Financials and Real Estate was back ended. Weakness in Financials (-4.8%) was felt after CBA’s February result, which flagged that net interest margins were under pressure. The sector was further hit in March as investors grew increasingly worried of contagion effects from the collapse of 3 US regional banks and the shotgun merger between Credit Suisse and UBS. This also had adverse second order impacts on Real Estate (-6.6%), a sector dependent on regional banks for credit.
- Rates and Yields: Yields drastically declined as the US 10-yr retreated 41bps to end at 347bps, while the AUS 10-yr retreated 75bps to 330bps. While a strong labour market in February sparked fears for stubborn wage inflation, focus subsequently pivoted from inflation control to the preservation of financial and economic stability in reaction to the banking crisis. Locally, yields also fell in reaction to a moderating March inflation print of 6.8% – the lowest since June 22.
- Reporting Season: Whilst 1H23 reporting season saw more earnings misses (36% of companies) than beats (28% of companies), earnings overall were quite robust despite the pressures from high interest rates. This, in our view, reflects the large savings balances held by households leading to demand holding up and good market structures domestically allowing companies to put prices up. The outlook commentaries were cautious as demand conditions were uncertain and elevated wage pressures were being felt across the economy. Forecast revenues were higher for FY23 and FY24 but EPS were downgraded for both years.
- Commodities: Iron ore prices rose 10.4% over the quarter; expectations of demand returning in China following the end of Covid restrictions. Gold prices were also strong during the quarter rising by 8.0%. In contrast, Brent Crude prices declined 7.2% due to an anticipated slowdown in the developed world.
- Corporate News: The March quarter featured a wave of corporate news/activity both globally and locally. Prominently featured was the global banking crisis catalysed by the run and subsequent bankruptcy of three regional banks in the US. The fear of deposit runs and heightened funding costs had spill over effects on the entire banking ecosystem, resulting in a series of recapitalisations (eg. First Republic, Signature) and M&A (ie. UBS and Credit Suisse). While the Australian banks equities sold off, there was limited contagion in funding markets.
M&A was also active in the quarter despite the rising cost of debt, notably from private equity who are sitting on considerable amounts of dry powder. Australia is seen as an attractive investment destination given a relatively better economic outlook and oligopolistic market structures. Examples during the quarter included the TPG bid for Invocare at $12.65ps (41% premium), and KKR-backed Soufflet bid for United Malt Group at $5.00ps (42% premium). Albermarle made a bid for Liontown Resources at $2.50/share, a 63% premium to last close. Kelsian purchased All Aboard America Holdings, the 4th largest motorcoach USA operator for US$371m (6.9x CY22 EV/EBITDA) and Newmont lobbed a $24.5bn bid for Newcrest Mining.
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