The Antares Elite Opportunities Fund delivered a return of 0.6% (net of fees) for the month of July, outperforming its benchmark by 0.6%.
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. 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.
Resource stocks had a mixed impact on performance. Both Rio Tinto (RIO) and BHP Billiton (BHP) were 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. The Fund benefited from being overweight RIO but an underweight position in BHP detracted from relative performance. RIO’s quarterly production report was on the weak side, with Pilbara shipments flat and shipment guidance cut to 330mt from 330-340mt. Hard coking coal production was lower than expected, mainly due to the impact of Cyclone Debbie. BHP’s quarterly production report was more solid, with Pilbara shipments up 14% in the quarter and FY18 iron ore guidance suggesting 3% growth on the previous year.
Offshore earners also 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 however, an overweight position in Aristocrat Leisure (ALL), that has a significant US business, detracted from performance. ALL also announced that its Chief Financial Officer (CFO) role was being relocated to North America from March 2018 but the existing CFO, Toni Korsanos, has declined the offer to move to the US for family reasons. Hence the company has commenced the process of hiring a new CFO.
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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