A month to remember: reviewing the ASX in November

The ASX 200 bounced back in November. In this week’s Investor Spotlight, we take a look at what drove the market higher last month and zoom in on three stocks that outperformed.

The ASX200 surged on Fed, China hopes

Global equities rebounded in November, thanks to growing hopes of a less aggressive US Federal Reserve and rumblings of easing COVID-19 restrictions in China. As a value-oriented index, the ASX 200 other global benchmarks, as investors priced in a possible recovery in Chinese economic activity. The bourse gained 6.13% for the month – its biggest single-month gain since November 2020.

It also took the index to nearly a six-month high and to levels it was trading at prior to the RBA’s aggressive policy tightening, which saw the central bank cram in 275 basis points of rate hikes. Remarkably, the rally also took the All Ordinaries Accumulation Index – an index that factors in dividends to its performance - to near-record highs.

Three stocks to watch

Because the ASX 200’s strength was driven by the dual prospect of less aggressive global monetary policy and a re-opening of China, the areas of the market which outperformed were mixed. Utilities and other defensive sectors performed strongly due to the fall in long-dated bond yields. But materials stocks also delivered a strong performance as iron ore prices recovered on hopes for stronger Chinese demand.

Here are three stocks that surged during the month of November.

• Origin Energy

Origin Energy was one of the bright lights last month, with the stock adding 41.1%. The business has benefitted from higher energy prices. However, as a utility company, the run-up on global bond yields in 2022 has reduced its investment appeal. The nearly 50-point drop in the Australian 10-year yield reversed this trend in November, supporting the stocks material rise.

In its latest corporate update, Origin was positive on the outlook for gas prices and demand. A significant uncertainty is the potential introduction of price caps by the Australian government, as higher energy prices put pressure on households. The business could be shielded from the effects of caps if the government chooses to fully subsidize the gap between the market price and price cap. However, if it expects the company to absorb some of the cost, it could reduce Origin’s profits.

The analyst community is widely bullish on Origin shares, with seven of 13 analysts recommending a buy, while the remaining six suggest a hold. The consensus price target is below the current market price, however, and at around $7.25.

The technicals are now looking bullish for Origin energy, with price momentum shifting to the upside. $8.00 is the next key level of resistance, with the previous resistance at $7.00 turning into the first level of support. Several key moving averages have coalesced around $6.00.

Origin Energy weekly chart

• Fortescue Metals

The iron ore miners staged a significant recovery in November, with Fortescue Metals recording an increase of 31.84%. The prospect of easing restrictions in China, along with a “16-point plan” from the central government to support its struggling property sector, has added to hopes for a rebound in demand for iron ore.

All iron ore players benefitted from the upswing, as did the general commodity complex. Fortescue Metals Group was an outperformer as a pure iron ore player, and a higher beta stock.

The outperformance for FMG came despite a mixed response to the company’s AGM, in which CEO Twiggy Forest shifted executive remuneration towards climate goals, along with a couple of broker downgrades. Analysts are relatively bearish on the stock, with eight recommending a hold and 11 recommending a sell. The consensus price target is approximately 20 percent below current prices at $15.98.

Price has broken above downward sloping resistance, with short-term momentum shifting to the upside. The stock is struggling to break the 100-day moving average, however, with $20 as a key level of resistance and the 50-day moving average acting as support. A break above that level could open a test of $22.

Fortescue Metals weekly chart

• Newcrest Mining

Although it was not the best-performing gold miner on the market, blue-chip player Newcrest Mining rallied by a respectable 14.18% last month. Gold stocks have underperformed for most of 2022, as a stronger US dollar and higher bond yields reduce the appeal for the commodity.

However, after November’s FOMC meeting, in which the Fed flagged a step-down in the size of future rate hikes, along with a US CPI figure that was well below expectations, Treasury yields and the US dollar tumbled, supporting the gold price.

Although the Australian dollar gold price was less impacted because of a rising currency, the predominance of global investors in Australian gold stocks, which price their portfolios in US dollars, meant that the demand for miners jumped.

Analysts are generally bullish on Newcrest Mining, as one of ASX’s premium gold plays. Nine have a buy rating, while eight have a hold, with a price target of around $24.28.

Newcrest shares are clearly in a downtrend still, however, the weekly RSI is turning higher as the price pushes to resistance at $21. A break of that level could drive a reversion to the 50-day moving average. Support appears around a confluence of levels at $18.50.

Newcrest Mining weekly chart