The ASX has fallen today with the ASX 200 crashing to a near eight-week low.
Driving down the local market was the tech sector. It’s no surprise, as tech is generally the whipping boy in a high inflation/high interest rate environment.
Investors tend to drop high priced tech stocks that may deliver higher returns in future for value stocks.
Tech stocks are in a bear market, with prices close to where they were back in 2000, however, earnings are far more robust in 2022 and while they have declined, they are still roughly 60% above 2000 levels.
In historical terms, tech stocks are still moderately priced.
The Leuthold Group chief strategist Jim Paulsen said, “In March 2000, the market-cap weighting of the tech sector was 34% compared to only a 7.9% weight for total economic activity.
“The dotcom top involved a stock market in which its leading sector was priced disproportionately above its economic contribution. Today, though, the market-cap weighting of tech to the S&P 500 is only 27.2% versus an economic weighting of 17.5%.
“Is the tech sector as cheap as it has ever been? Gauged by its contribution to the general economy? No. Is it grossly overpriced or anywhere close to its relative value compared to the economy in 2000? No!”
As for the ASX 200, it dropped 102.70 points or 1.43% to 7,102.90, setting a new 20-day low. Over the last five days, the index has lost 3.32% and 0.31% over the last 52 weeks.
The bottom performing stocks were Imugene Ltd (ASX:IMU, OTC:IUGNF) down 11.11% and Novonix Ltd down 11.45%.
Magellan is another stock suffering today, losing 9.2% after its decision to sell its stake in Mexican fast food company Guzman y Gomez to focus on core assets.
Banks capitalise on economic recovery
A report by KPMG has found that Australia’s major banks reported improved profits and returns for the first half of the financial year 2022, despite ongoing pressure on their interest margins.
KPMG’s Major Australian Banks First Half Year Analysis Report 2022 reports the combined cash profit after tax from continuing operations was $14.4 billion, up 5.1% on 1H21.
Profits are now close to pre-COVID levels driven by continued strong volumes in both mortgage and business lending. As Australia powered ahead in the first half of FY22, both areas saw continued high demand. The value of mortgage loans was up 2.5% on 2H22, growing to $1,812 billion. At the same time, business lending grew 4.8% in the last half year, to a figure of $1,077 billion.
“The major banks have successfully used the recovery of the Australian economy and the strong housing market performance to deliver improved financial results," KPMG Australia’s newly appointed head of Banking and Capital Markets Steve Jackson said.
"With returns on equity in the sector now again restored to double digits but with uncertainty ahead, it will be interesting to see how they maintain their current momentum,”
As expected given the continued low interest rates (the RBA only just increased interest rates for the first time since November 2010), net interest margins (NIM) have continued to decrease and have acted as a drag on financial performance.
For the majors, the average NIM dropped to 175 basis points, down 13 basis points from FY21. The industry-wide depressed NIMs have been the primary brake on the Majors’ profit growth.
“The market dynamic has been dominated by the NIM decrease resulting from low lending rates in a very competitive market and strong demand for low margin fixed rate mortgages,” KPMG’s Banking Strategy lead Hessel Verbeek said.
“This downward pressure has only partially been offset by lower funding costs from near-zero deposit rates. The impacts of an extended period of low interest rates are deeply baked into net interest margins.”
Verbeek added: “While the overall outcome has been an almost flat cost trajectory for the Majors, there are three things happening which are netting each other out. Inflation has driven up ‘run-the-bank’ costs, further growth and transformation costs have been added and meanwhile, some cost reductions from efficiency programs have been realised. Unfortunately, this means that the Majors are not on a path of significant sustainable cost improvements.”
Key highlights of the results are:
- The Majors reported a combined cash profit after tax from continuing operations of $14.4 billion, up 5.1% from the prior comparative period (PCP). This result reflects strong growth in lending and reductions in large one-off notables including remediation/regulatory and impairment expenses.
- The average net interest margin (cash basis) saw continued compression, decreasing 13 basis points from the first half of 2021 to 175 basis points. Declining margins were driven by low lending rates, a shift in the housing lending mix towards lower margin fixed rate lending and higher holdings of low-yielding treasury assets and.
- Cost-to-income ratios decreased modestly from an average of 50.3% in HY21 to 49.6%. The Majors reported a decrease in operating costs of 1% to $19.7 billion, reflecting reductions in notable items, offset by higher staffing expenses in response to increased lending volumes, wage inflation, and increased investment in growth and productivity.
- Write-backs to aggregate loan impairment expenses of $218 million were driven by continued improvements in the economic outlook and strengthened asset quality. These releases were offset in part by targeted provisioning to capture potential downside in the evolving macro-environment and monetary policy changes.
- On average the Majors’ Common Equity Tier 1 (CET1) ratio decreased by 90 basis points to 11.8% as all four of the Majors completed share buy-backs over the half and lending growth has driven higher Credit Risk-Weighted Asset (CRWA) usage. The Majors’ CET1 ratio still remains comfortably above APRA ‘unquestionably strong’ benchmark of 10.5%.
- Dividend pay-out ratios increased to 66.0% from 63.2% in the prior comparative period.
- Higher earnings have seen Returns on equity (ROE) increase by 21 basis points from the PCP to 10.6%, returning to the double-digit standards from before the pandemic.
Going forward, the RBA rate rise from May 3 signalled the end of a prolonged period of ultra-low interest rates. There is a general expectation that this will support a recovery of NIMs.
“We expect to see the dual impacts of both net interest margin relief and higher levels of mortgage book stress, as RBA interest rates are expected to increase several times. However, these impacts will take their time to pull through as both margins and book quality have built up their momentum over a long period of low rates,” Verbeek said.
On the small cap front
Only one company we covered today was in the green.
Nexus Minerals Ltd finished 3.45% higher.
This is reflective of the broader market.
The S&P/ASX Small Ordinaries [XSO], the small cap index, was down 3.05% today.