The Antares Australian Equities Fund delivered a return of 0.3% (net of fees) for the month of July, outperforming its benchmark by 0.3%.
The Australian share market was flat in July but this masks quite strong sectoral divergence. Healthcare stocks (-7.5%) and other companies with significant US dollar earnings came under pressure as the Australian dollar ($A) rose 4.1% to 80 US cents, undermining the $A value of their offshore earnings. Utilities (-5.3%) and telecoms (-4.2%) also underperformed, impacted by higher bond yields and ongoing perceptions of earnings and dividend risk amongst telecom stocks due to competitive pressures. By contrast, the resource sector (+5.0%) was boosted by favourable growth data in China and rising commodity prices. Banks (+2.3%) and consumer staples (+1.1%) also had a better month.
The Fund benefited from an overweight position in Santos (STO) that delivered a strong quarterly production report that included a slight upgrade to full year production guidance. STO also reduced net debt by US$200m during the quarter and revealed that ongoing cost cutting has reduced its breakeven oil price to US$33/bbl. Offshore earners had mixed impact on performance, with most of these companies weakening as the strong rise in the $A undermines the value of their foreign currency denominated earnings. The Fund does not hold a position CSL and this contributed positively to relative performance in this environment however, an overweight position in Ansell (ANN) detracted from performance. ANN announced a transformation programme having reviewed its business portfolio in light of the announced divestment of its Sexual Wellness division in May 2017. The plan includes accelerated capital expenditure of around US$30-50m that is intended to boost growth and ANN is hoping to achieve cost savings of around US$30m by FY20.
An underweight position in BHP Billiton (BHP) also detracted from performance as the stock was boosted by the 13.5% rise in the iron ore price in response to improved Chinese growth data and stronger demand from Chinese steel makers. BHP’s quarterly production report was also solid, with Pilbara shipments up 14% in the quarter and FY18 iron ore guidance suggesting 3% growth on the previous year.
The Australian share market is facing some headwinds at present, with the strength in the Australian dollar undermining the outlook for companies with offshore earnings and investors increasingly nervous about a sharp slowing in the domestic property market. The latter has negatively impacted banks and 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 has rallied in response to better Chinese growth data although for this to be sustained, the Chinese economy will need to show ongoing signs
of improvement. From a valuation perspective, the overall market is still quite fully valued according to Goldman Sachs data, trading on a PE of around 15.5 times which is 5% above its 20-year average.
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