The Antares High Growth Shares Fund delivered a return of -0.4% (net of fees) for the month of July, underperforming its benchmark by 0.4%.
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 overweight positions in JB Hi-Fi (JBH) and Santos (STO). JBH rebounded somewhat from the “Amazon fear” related weakness that impacted the retail sector in the June quarter but there was no stock specific news released. STO benefitted from an 8% rally in the oil price and 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$33bbl.
The main detractor from performance was an overweight position in Aristocrat Leisure (ALL) that weakened in response to the strong rise in the $A undermines the value of its foreign currency denominated earnings. 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. Being underweight BHP Billiton (BHP) also detracted from relative performance as the stock was boosted by the 13.5% rise in the iron ore price in response to improved Chinese growth data and strong demand from Chinese steel makers.
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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