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Antares Australian Equities Fund - May 2017

The Antares Australian Equities Fund delivered a return of -2.8% (net of fees) for the month of May, in line with its benchmark.

The Australian share market underperformed global markets in May, with the S&P/ASX 200 Accumulation Index falling 2.8%. The market was dragged down by weakness in the bank sector (-9.8%), along with healthcare (-2.1%) and REITs (-1.1%). Resource stocks outperformed (+1.2%) despite a 17.1% fall in the iron ore price in response to concerns about Chinese growth. Industrials (+4.7%) were the strongest sector, led by strength in Qantas Airways (+18.2%). Telecoms (+3.4%) and energy (+2.0%) also outperformed the broader market.

An overweight position in Caltex Australia (CTX) contributed positively to the Fund’s relative performance. CTX announced that it would assist employees of its franchises that have been underpaid by establishing a $20m fund. CTX will seek to recover the cost from offending franchisees. CTX also announced a higher refiner margin of US$15.32/bbl in April compared to $US11.65/bbl in March. An underweight position in Commonwealth Bank (CBA) also contributed positively to the Fund’s relative performance as the bank sector was negatively impacted by the bank levy that was announced in the Federal Budget and concerns that the domestic housing market may be on the verge of weakening.

The Fund’s overweight position in Vocus Group (VOC) performed poorly as management downgraded FY17 earnings guidance by around 15% and also lowered its expected revenue and net profit targets. This mainly reflected higher than forecast expenses, higher headcount, accounting changes and lower than expected revenues. An underweight position in BHP Billiton (BHP) also detracted modestly from relative performance. BHP announced plans to invest around $5b to unlock latent capacity, suggesting it could potentially boost the miner’s production by 20%. BHP also updated its productivity and cost targets, with the new iron ore and coal cost guidance being better than analysts’ expectations.

The Australian share market is facing some headwinds, with investors increasingly nervous about a sharp slowing in the domestic property market. This is negatively impacting the banks and also consumer facing stocks as investors fear a slowdown in consumption if the property market comes under pressure. The
potential entry of Amazon into the Australian market is also contributing to the de-rating of retail stocks. The resource sector is vulnerable to slowing growth in China and weakness in commodity prices, particularly iron ore. From a valuation perspective, the overall market is still quite fully valued but Goldman Sachs data suggests the 10% fall in bank stocks during May has the sector trading at a 33% discount to industrial stocks which is quite extreme in an historical context.

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