The S&P/ASX 200 Accumulation Index was largely flat during the month, returning -0.01%. The Australian market again lagged global equity markets which were generally positive. The stronger Australian dollar (AUD) weighed heavily on the local market. Globally, equities were buoyed by a better than expected US reporting season and a dovish US Federal Reserve.
Emerging markets outperformed developed markets in July. In the US, the S&P 500 finished up 2.1% after hitting an all-time record high mid-month. Europe lagged, with the Euro Stoxx 50 up 0.3% and the UK’s FTSE up 0.9%. Japan was the laggard with the Nikkei 225 down 0.5% during the month.
During the month, the Reserve Bank of Australia (RBA) maintained the cash rate at 1.50%. The RBA highlighted that slower growth in the first quarter was only partly due to temporary factors. It believes that that global growth remains positive, the local labour market is improving and that recent macro-prudential measures will help address any housing market risks. The RBA remains concerned over the outlook for consumers as they face low wages growth and elevated levels of household debt.
In the latest economic data, headline inflation rose a weaker-than-expected 0.2% in Q2, with the annual rate at 1.9%, which is below the bottom end of the RBA’s 2-3% target range. Retail sales for May grew a stronger than expected 0.6%. Employment for June exceeded expectations, rising by 14,000 positions, driven largely by full-time employment. The unemployment rate remained steady at 5.6%. The NAB business confidence survey was higher at +9 in June. Meanwhile the business conditions survey was also stronger, with a June reading of +15, the highest level since 2008. Building approvals however disappointed, falling 5.6% in May.
In stock specific news, Myer Holdings downgraded guidance due to continued weakness in retail trading conditions. Flight Centre upgraded guidance due to strong second half results in its US and UK markets. Fairfax Media confirmed that discussions with two private equity firms had concluded, ending prospects of a potential buyout of the company.
Sector returns were mixed during the month. The Materials sector was the best performer, up 3.6%. Financials ex-REITs (1.2%), Consumer Staples (1.1%) and Energy (0.4%) were also positive. The REITs (-0.1%), Consumer Discretionary (-0.9%), Industrials (-3.2%), Telecommunications (-4.3%) and Utilities (-5.3%) sectors were all negative. The worst performing sector was Healthcare (-7.5%) which was dragged lower by earnings concerns due to the rising AUD.
The Materials sector outperformed the broader market on the back of a rise in commodity prices, particularly iron ore, and the release of solid quarterly production results from a number of the majors. BHP (11.0%), Fortescue Metals (10.0%), South32 (8.6%) and Rio Tinto (4.0%) were key contributors to the outperformance of the sector.
Financials ex-REITs also posted a positive return during the month. The domestic banks enjoyed a bounce in June following the better-than-expected ruling on capital requirements from the regulator, APRA. The major banks will be expected to increase their core tier one equity rations to at least 10.5% over the next couple of years, which was less than the market was expecting. Of the big four banks, Westpac (4.3%) and ANZ (3.2%) outperformed NAB (1.2%) and the Commonwealth Bank (1.1%).
The Industrials sector sold off on the back of rising bond yields and the stronger AUD. Key detractors included Qantas (-7.0%), Aurizon (-6.3%), Sydney Airport (-5.1%) and Transurban (-3.7%).
The Telecommunications sector underperformed, dragged lower by sector heavyweight Telstra (-4.7%). The Utilities sector also underperformed with AGL Energy (-5.5%) and APA (-6.0%) the main detractors.
The Healthcare sector which is heavy with ‘offshore earners’ that were impacted negatively by the stronger AUD was the worst performer during July. CSL (-8.7%), Cochlear (-8.1%), Mayne Pharma (-11.5%) and Sonic Healthcare (-8.0%) were the key detractors.