The Antares Dividend Builder Model Portfolio delivered a return of -3.2% (net of fees) for the month of May, outperforming its benchmark index by 0.3%.
The Industrial sector of the Australian share market underperformed in May, with the S&P/ASX 200 Industrials Accumulation Index falling 3.5%. The market was dragged down by weakness in the bank sector (-9.8%) and the retail sector (-9.3%), with the latter being impacted by ongoing concerns about slowing consumer demand and the possible entry of Amazon into the Australian market. By contrast, the transport sector (+6.0%) performed relatively well, led by strength in Qantas Airways. Capital goods (+5.9%), telecoms (+3.4%) and energy (+2.0%) also outperformed.
The Portfolio benefited from overweight positions in Sydney Airport (SYD) and Spark Infrastructure (SKI). SYD announced that it will not be accepting the Notice of Intention from the Commonwealth Government to develop and operate the new airport planned for Western Sydney as it believes the terms do not adequately compensate SYD’s shareholders for the risks associated with the project. April air traffic data were also very favourable, with a 12.1% rise in international traffic over the year and year-to-date data for FY17 showing 7.2% growth in international traffic compared to the same period in FY16. SKI reaffirmed its distribution guidance for FY18 and was also probably a beneficiary of the DUET takeover as some investors had to redeploy cash into other utility stocks. SKI was unsuccessful in its bid to acquire a stake in another distribution asset that was privatised by the NSW government, hence investors were also relieved that the company would not need to raise more capital at this time.
An overweight position in ANZ Banking Group (ANZ) detracted from the Portfolio’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. Being overweight Fletcher Building (FBU) also detracted from relative performance. Prior to our investment, management downgraded its FY17 earnings guidance by 13%, mainly due to larger than expected losses on two major projects that have negatively affected the earnings of its Construction division.
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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