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Why did lithium and supermarket stocks plunge while JB-HiFi and Lovisa beat expectations? We look back at the year that has been in the markets
In some ways, it turned out to be a better year than expected for Australian workers, who were trying to boost their retirement savings during a cost-of-living crisis.
For those who invested their retirement in a balanced option, the average return was around 9% in the last fiscal year, rising to 11% for those who were willing to take on more risk with a growth option.
“Super performed much better than expected in the last financial year,” said SuperRatings insights manager Joshua Lowen.
“In the first half of the year, equity markets did not perform particularly well, but from November 2023 onwards, international and Australian equity markets have really recovered,” he said.
Stocks are an important driver of most people’s retirement balances.
“And this recovered the initial losses and exceeded expectations, bringing returns for the year above the long-term average, which is around 7 percent.”
Joshua Lowery says superannuation funds have performed well this financial year. (ABC News: Daniel Irvine)
What drove stock markets higher? Banks!
The ASX 200 is near record levels after rising almost 8 per cent in the 2023-24 financial year. (When dividends are included, Australia’s benchmark share index gained more than 12 percent.)
Gains were driven mainly by the financial sector, with NAB shares jumping 38 percent last year to their highest since December 2007 (just before the global financial crisis).
The Commonwealth Bank share price rose 27% during this period and briefly reached a new all-time high ($128.68) in late June.
Catherine Allfrey says Australia’s financial sector has performed excellently on the ASX this year. (ABC News: Dan Irvine)
“What we’ve seen with the banking sector in particular is that they raised a lot of money during COVID expecting that there would be bad debt losses over the last few years, which didn’t materialise,” said Catherine Allfrey, portfolio manager at Wavestone Capital.
“What they did was return that capital to shareholders, so they repurchased their shares.
“In the case of Westpac, they also paid a special dividend, which was very positive for share price performance.
“Additionally, the economic outlook has been better for banks. So if the economy is performing reasonably well and there are no bad debts on the horizon, then clearly those sectors have been reassessed [higher].”
Consumer discretionary stocks performed surprisingly well
NabTrade’s head of investor behavior, Gemma Dale, was surprised by the types of stocks that performed well.
“The performance of different sectors has been really counterintuitive,” she said.
“What you expected to perform very well — in a slow economic environment — didn’t perform so well. And what you expected to perform very poorly actually probably went out the lights.”
In particular, she was referring to the consumer discretionary sector, which increased by 23% last year.
Some of the top performers in this sector include jewelry chain Lovisa (74%) and Premier Investments (56%), which owns Peter Alexander, Smiggle, Just Jeans and other retail brands, as well as JB Hi-Fi (43% ).
“The consumer is holding up relatively well, but we are certainly in a per capita recession, people are spending less.
“There is a huge gap between the ‘haves’ and the ‘have-nots’ when it comes to spending.
“So, younger people, especially those who don’t own their own homes, are in serious trouble, as rents have increased dramatically.”
Consumers have gradually tightened their discretionary spending budgets, but have only started adding new limits in recent months, according to Ms. Allfrey.
“And so in the first nine months of this fiscal year, what we actually saw was consumer savings declining, but wage growth was better than expected.
“So that was holding the economy back on top of the very strong immigration that we saw. And that really held back those consumer stocks.”
Gemma Dale says the outperformance of consumer discretionary stocks has been counterintuitive amid the cost of living crisis. (ABC News: John Gunn)
Supermarkets sank
In contrast, the consumer staples sector (-6%) was the worst performer on the ASX.
It was dragged down by shares in Coles (-8%) and Woolworths (-15%) in particular last year.
“This is the kind of company you think will continue to operate,” Dale said.
“When you know consumers are under pressure, for example, they will still buy groceries. That’s not the case!”
According to Ms Allfrey, this was mainly driven by cost of living pressures, prices and political pressure placed on these companies.
“But we also had a CEO change at Woolworths also. So that was a big change there.”
AI fever drives the technology sector
Technology was the best performing sector on the ASX, up more than 30% compared to last year.
Tech stocks that saw the biggest gains included Life360 (+120 percent), Altium (+87 percent), Megaport (+66 percent) and Zip Co (+252 percent).
Analysts said that’s partly because bullish sentiment in the U.S. technology sector is being reflected here.
On Wall Street, the Nasdaq Composite rose 32% last year.
It was driven in particular by AI chipmaker Nvidia, which grew more than 200% to become (briefly) the the most valuable company in the world — with a market value of US$4.67 billion.
“One of the big themes of the last 12 months has been AI,” Allfrey said.
“And the stocks that are exposed to that, in the case of Australia, are data centers, whether it’s NextDC [+44 per cent] or Goodman Group [+71 per cent]”, performed exceptionally well.”
Lithium performs poorly
One thing becomes clear when we look at the list of worst performing stocks.
Many of them are lithium companies – and none of them are making a profit. They include Core Lithium (-89 percent), Lake Resources (-86 percent), Piedmont Lithium (-83 percent), Global Lithium Resources (-82 percent), Galan Lithium (-81 percent), Sayona Mining (-78 percent) and Liontown Resources (-68 percent).
After rising astronomically in recent years, enthusiasm for lithium has waned, Dale noted.
“People were looking for the next big thing, which was all about lithium and battery technology.
“Selling Tesla [shares] go to the Moon, there was a lot of heat in that sector.
“And what that meant was that investors were chasing a lot of companies that weren’t hyperviable. There was a lot of hype.”
In fact, Tesla’s share price fell 23% last year as sales slowed and competition intensified in the electric vehicle market.
Not to mention that the price of lithium fell by more than 70% during this period.
“Those ones [lithium companies] that have strong, viable business models that will perform well over the long term.
“Those that were a little more speculative might not work out as well,” Dale said.
An increase in supply reaching the market, especially cheaper lithium from Africa, as well as a drop in demand for electric vehicles abroad have weighed on prices, according to Allfrey.
“We’re just not seeing the same level of demand – and at the growth rate that the market was expecting – and so you saw those [lithium] names sell substantially.”
What are the biggest risks we face?
While many analysts expect the stock market to rise and reach new records in hopes that the RBA will cut interest rates, they also warn that there are some risks ahead.
One of them is China, our biggest iron ore customer, where fears of an economic crisis are high.
The Chinese economy has been hit by weak consumer sentiment and a prolonged slump in the property sector.
“I think Australian investors will be concerned about things like the price of iron ore and what’s happening in the Chinese property market,” Dale said.
“We’ve been worried about this for a long, long time, but the iron ore price has defied expectations a bit despite that.
“So I think a lot of investors are worried that there will be a big pullback, and that really affects the Australian stock market as BHP represents a huge chunk of it.”
Ms Dale also identified cost-of-living pressures as another risk.
“Australian households are the second largest debt holders in the world, and this has huge implications for our financial sector if we see a rise in unemployment.
“You would also be very concerned about things like discretionary consumption.
“But we were having this conversation 12 months ago and, ironically, these are the sectors that have performed best, so it’s dangerous to make predictions.”
Allfrey agrees that one of the biggest risks going forward is what will happen to the Australian consumer, given that consumer spending accounts for around 60 per cent of the country’s economic growth.
Weaker spending can lead to higher unemployment (as struggling companies cut costs by laying off workers). And the federal government’s cuts to immigration could lead to weaker economic growth.
“The final risks I’ll point out are the US election. Who knows what the impact of that will be… if Trump wins? And the impact on tariffs and global trade, given that [Australia] are a global trading nation.
“Therefore, we need a stable geopolitical environment for our exports to be successful.”