Where are we? What are the lessons from May?

For years we have been told that ‘value’ will have its day again. The reasoning is vast, deep value in value versus overpriced growth, pricing in risk is stretched, the ‘free money decade is over, and growth will be left holding the bag. You can take your pick as to what reasoning you use regarding this market conundrum, but the conclusion is this.

Growth is still monstering value.

Thus let’s review the ASX 200, one of the clearest ‘value’ plays out there with its high exposure to defensive, value and cycle sectors versus some of it global peers.

May saw the ASX 200 index rising by just +0.9% compare this to the +4.8% rebound observed in US equities or European equities that saw gains of between 2% and 6%. Yes, parts of Europe are more ‘value’ than the US but in the main the ASX’s underperformance is something of a continuing trend of the past decade.

The drivers of the global rebound were largely influenced by weaker economic data and comments from the Federal Reserve, which indicated a lower probability of imminent interest rate hikes. Countering that for Asia (and thus Australia) was a weaker than expected rebound in China, an easing in iron ore and overall concern that Asian growth is starting to drag.

Thing is – if you look at the sectors inside the ASX the growth versus value trade is playing out here:

Sector Performance

1. Technology (+4.5%): The biggest “growth” area – Technology led the ASX gains, buoyed by the big lead player in the likes of Xero (XRO, +10.6%) and Technology One (TNE, +9.7%) which both release strong earnings numbers in the month. These results underscored the sector’s potential for substantial earnings growth despite the pressure from high bond yields, which flies in the face to the macro view that growth is facing a funding issue. Furthermore – The majority of the sector’s rise was attributed to actual earnings improvements rather than just price-to-earnings (PE) expansion, which has been seen in places like Staples and Discretionary.
2. Banks (+3.6%): Each year May is sometime renamed – Bank earning month. The lead up expectations to the release from NAB, ANZ, WBC and Macquarie were mixed. The fears from the market included: the ‘mortgage cliff’, lower new loans and margin risk. The results even surprised the CEOs with all suggesting they were pleasantly surprise by the ‘resilience’ of banking customers this saw a positive earnings season characterised by lower-than-expected impairments and margins that were not a low as expected.
3. Communications (-2.8%): This sector was the laggard, with a notable -4.6% decline in telecom stocks. The negative performance was driven by Telstra (TLS, -5.4%), which announced a shift away from CPI-linked post-paid mobile pricing, causing market concerns. If there was ever a stock that highlights ‘value’ that isn’t value TLS, is it. Low project pipeline and the prospect of flat earnings and a high payout ratio makes TLS that stock that is siting no-mans-land.

Key Stock Performances

• Aristocrat Leisure (ALL, +13.5%): ALL was the standout performer in the ASX 50, following a strong first-half 2024 earnings beat and the announcement of a strategic review of its subsidiaries BigFish and Plarium.
• Negative Surprises: Several stocks experienced significant declines due to disappointing earnings. These included James Hardie Industries (JHX, -13.7%) and Sonic Healthcare (SHL, -9.1%) among large caps, and Bapcor (BAP, -26.5%), Eagers Automotive (APE, -19.9%), and Fletcher Building (FBU, -18.2%) among smaller caps. All had structural reasons for there declines – but in the main these are players are exposed to cyclical issues and either can’t grow or are areas of economic slowdown.

Getting back to market momentum

Looking at the market action and momentum in May there was something of note. Buying ‘speed’ – that being a measure of positive equity market sentiment, increased to 1.21 in May from 0.68 in April, indicating heightened investor enthusiasm despite the underperformance versus global peers.

Historically, when buying speed exceeds 1, ASX forward returns tend to fall below average over the following year, suggesting a potential risk of a market correction. Additionally, June is traditionally a weaker month for ASX equity returns, often impacted by tax loss selling and other end of financial year movements.

Other influences

Despite a higher-than-expected CPI print in May, rate expectation interestingly enough moved into a slight dovish position (if only just). ASX Cash Futures are currently indicating a 5% chance of a 25-basis point rate cut in June. This might not seem relevant but it i a shift from a previously expected 3% chance of a rate hike. This fluctuating expectation reflects ongoing uncertainty in the economic outlook is creating a risk level in bond and fixed income markets that hasn’t been seen for months.

The conclusion from this is the RBA’s job is far from over and that market is clearly confused about when a rate movement in either direction will occur. This makes the ASX momentum that much hard to gauge as it is now competing with markets that are facing definite cuts in 2024. This can explain Europe’s outperformance as during the month of May the ECB has all but declared that it will cut rates in the coming meetings even as soon as the month. While the Riksbank cut rates for the first time in over half a decade seeing the Swedish bank being the second central bank in the G10 to cut rates in 2024 behind the SNB.

The take outs?

While May saw a positive, albeit modest, performance for ASX equities, driven primarily by strong earnings in the technology sector, there are several indicators suggesting caution in the coming period.

The significant increase in buying euphoria points to a possible weaker June performance highlight the potential for a near-term market correction. Then there is the cash allocation between global markets. With the slowing Chinese economy being a persistent issue, the “higher for longer” position from the RBA and then Europe and the US facing recharged economic conditions funds are likely to shift once again to the areas of growth seeing the ASX once again underperforming.

Thus investors should be mindful of these risks, particularly with upcoming earnings reports and central bank decisions on the horizon.