Financials and materials dragged down the performance of the S&P/ASX 300 in June after previously shielding the local market from the worst of the slump seen in equities globally.
Up until the end of May, the MSCI World Index (AUD) fell by 11.8 per cent while the S&P/ASX 300 was down only 1.6 per cent. However, the local index dropped by 9.7 per cent in June compared to a decline of 5.2 per cent for the world index.
Bruce Apted, head of portfolio management – Australia active quantitative equities at State Street Global Advisors, explained that the weighting of financials and materials in the S&P/ASX 300 has helped cushion the local index.
The financials sector, which makes up 28.3 per cent of the S&P/ASX 300, delivered a return of 2.1 per cent in the year to May while the materials sector, which accounts for 24.3 per cent of the index, returned 10.3 per cent over the same period.
“In other words, more than 50 per cent of the index was able to generate positive returns and this reduced the losses for the index,” said Mr Apted.
Technology was the main driver of the fall for the MSCI World Index (AUD), which has a 22.1 per cent weight to tech and was down 20.9 per cent as of the end of May.
The local technology sector had an even greater fall of 26.3 per cent but tech only makes up 3.6 per cent of the S&P/ASX 300.
Concentration to financials and materials, Mr Apted said, then went on to hurt the performance of the S&P/ASX 300. In the month to 23 June, financials dropped 12.3 per cent and materials fell 13.1 per cent.
Mr Apted noted that the previously positive relationship between the relative performance of financials and changing expectations of interest rates had decoupled in June.
“In 2022, as inflation surprised on the upside and the Reserve Bank of Australia (RBA) raised rates by 75 bps, and the market factored in even further tightening, investors became concerned about the risk to Australian growth,” he said.
“With rates moving higher, there is now a greater risk of an economic slowdown, a softer housing market and lower loan growth, all of which has negative implications for the profitability of many financial companies especially the banks.”
As for materials, Mr Apted said the sector was now looking less resilient due to the increasing risks of softening global growth.
“Economic theory suggests slowing global growth is usually associated with lower demand for many commodities, lower commodity prices, and commodity related companies underperforming,” he said.
“Empirical analysis supports this theory with periods of softening growth expectations (proxied by a flattening US yield curve) being associated with the global materials sector underperforming.”
