How did Aussie equities fare in FY22-23?

Technology was the leader in the last financial year while energy and materials, which make up half the ASX 200, saw difficulty. 

Over the 12 months to 30 June, the ASX 200 rose 9.7 per cent which added $276 billion in market capitalisation to bring the ASX 200 to $2.4 trillion, a record high. Seven of the last 12 months saw positive performance from the index.

The performance compared to a loss of 10.2 per cent in the 2021-22 financial year thanks to the war in Ukraine and the aftermath of the COVID-19 pandemic.

While it was improved year-on-year, the performance by the ASX 200 was poorer than in the US where the S&P 500 rose 20 per cent and the Nasdaq rose 23 per cent after seeing a rebound in the second half of the FY. Much of this was driven by tech stocks such as Nvidia and Apple which reached a US$3 trillion valuation. 

Steve Johnson, chief investment officer at Forager Funds Management, said: “The US has done much better than Australia, the MSCI World is up 20 per cent driven by the US and large tech companies, Meta has tripled its share price, so Australia is very middle of the road this year”.

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In Asia, the Shanghai Composite Index lost 5.4 per cent and the Hang Seng in Hong Kong lost 13 per cent as the countries re-emerged after an extended COVID-19 lockdown.

The Japanese TOPIX rose 24 per cent, reaching its highest close since August 1990 in May as foreign buying and domestic corporate governance improved.

Share holdings
The performance of Australian equities is particularly important given the bias by domestic retail investors to hold exposure in their home country rather than own international ones. 

The latest ASX Investor Study found 58 per cent of people held Australian shares directly compared to 16 per cent who held international shares directly. This rose to 71 per cent for retirees.

Australian shares are held by 63 per cent of men and 54 per cent of women.

Domestic equities are particularly popular with investors who hold them in a self-managed super fund (SMSF) with the holding rising to 73 per cent for SMSF investors compared to 58 per cent overall. 

They are also the most likely destination for those who are new to investing with 35 per cent of people who are looking to invest in the next 12 months saying they will do so via Australian shares.

Sector performance
All 11 of the ASX’s sectors reported positive returns but technology was the stand-out winner with returns of 37 per cent over the period.

Dale Gillham, chief analyst at Wealth Within said: “The tech sector has been dominant, especially over the last eight months, it has really outstripped the market. But it is a really small sector, less than 2 per cent of the ASX as we only have a few big tech companies like Xero and Wisetech. It is a sector in its infancy.

“Tech won’t be the stand-out next year, it will slow down. The sector got overheated and people were chasing returns and jumping on news which was pushing up prices.”

Shane Oliver, chief economist at AMP Capital, said: “Tech shot the lights out but it is a trivial weighting in the index. It was a recovery story after the rough ride in 2022 and was led by a positive lead from US tech stocks thanks to enthusiasm for artificial intelligence and ChatGPT.”

Performance was muted for financials and materials, which make up half of the index, with financials up 7.8 per cent and materials up 14.9 per cent.

“On the other hand, energy has been worse, financials haven’t performed well either and materials were only OK. They make up over half the market so if they aren’t performing than the market isn’t either,” Gillham said.

The best performing ASX 200 stock was lithium miner Liontown which was up 168 per cent driven by a takeover bid from a rival miner Albemarle. This was closely followed by technology company Life360 which saw a return of 167 per cent after its financial results exceeded expectations.

Telix Pharma rose 148 per cent after reporting strong 1Q23 results and Pilbara Minerals rose 113 per cent, also helped by merger activity in the lithium mining space and reporting its first dividend.

Looking at the worst performing stocks, Lake Resources lost 61.7 per cent after announcing delays to its latest project which caused its share price to crash 43 per cent in the final month. Star Entertainment, which has faced regulatory action and reported significant losses during the year, lost 55 per cent.

Another sector that struggled was real estate investment trusts (REITs) as they feel the impact of the four percentage point increase in interest rates to 4.1 per cent by the Reserve Bank of Australia. There are also cultural changes as staff are slow to return to offices after the pandemic and opt to shop online rather than visit large malls.

“The REIT sector are finally seeing the reality about interest rates and property values, they have been sticking their heads in the sand about valuations and the reality is catching up with them,” said Johnson.
Oliver added: “REITs are very interest-rate sensitive and there are concerns about property valuations and the lower demand for offices.”

Outlook ahead
Despite near double-digit returns this year, commentators were mixed on future outlooks and also raised the ever-present risk of a recession.

Piers Bolger, chief investment officer at Infinity Asset Management, said: “Based on current market valuations and using our forward P/E and the forward dividend yield assumptions for the market, we expect it to be only moderately higher (around 1.5 per cent to 2 per cent) from its current levels.  

“However, over the medium term (2024/25) we do see earnings being upgraded, which should lead to an improved outlook for the market. It’s for this reason we are broadly neutral on our positioning to equities across our multi-asset portfolios but will be looking to a further increase the exposure as the outlook for corporate earnings increases.”

Oliver said: “The ASX will be slower and subdued than this year, I’d expect to see returns of 5-6 per cent. FY20-21 was spectacular, FY21-22 was weak and this year has been strong so it goes in a rotation. That’s partly due to distortions from the pandemic which are now working their way out.  

“There is a risk of recession, central banks are still threatening to keep raising rates and there are geopolitical risks. Global markets have been very overbought so if we see a correction there, that will eventually happen in Australia too.”

In his firm’s Forager Australian Shares Fund, Johnson said he is exploring the smaller end of the tech sector and the healthcare space. RPM and ReadyTech both sit in the fund’s top five holdings at 7.2 per cent and 5.5 per cent respectively as at 31 May 2023.

“We still like profitable tech sector in the small and mid-cap space such as RPM and Readytech, it hasn’t yet recovered like the large-cap ones and they are less likely to be hit by an economic slowdown.

“In healthcare, it is suffering from cost inflation but people will appreciate its defensive nature. There is also less disruption from COVID-19 now.”