The S&P/ASX 200 Accumulation Index returned 2.8% during the month. Australian equities lagged most developed markets in August. In major global developed markets the US S&P 500 was up 7.2%, Japan’s Nikkei 225 was up 6.6%, the DJ Euro Stoxx 50 was up 4.5%, while the UK’s FTSE 100 was up 1.8%.
The Reserve Bank of Australia (RBA) reaffirmed its commitment to support the financial system through a historically low cash rate of 0.25% and yield curve control to keep 3 year bonds at 0.25%. The RBA also announced it is extending the Term Funding Facility in both size and duration. These measures are intended to keep funding costs low and sustain credit availability.
Domestic economic data releases were brighter in August. Employment rose by 114,700 positions in July, exceeding market expectations. The unemployment rate rose to 7.5%, which was also better than feared, however this was the highest jobless rate since November 1998. The NAB Survey of Business Conditions continued to rebound in July, turning positive at +3 points, with business confidence remains weak at -14. Retail sales were up 2.7%. National CoreLogic dwelling prices continued to fall in August, ending the month down 0.4%.
Overall the August reporting season was better than feared, with a number of stocks showing surprising resilience during the COVID-19 crisis. There were generally more beats than misses and cash flow was strong. Stocks that showed resilience were largely in the consumer staples, building materials, discretionary retail, gaming, general industrials and insurance sectors. Overall FY21 EPS was revised downwards, with downward revisions primarily in the industrials and financials, while resources saw positive EPS revisions thanks to rising iron ore and copper prices. Some of the negatives to come out of reporting season were that approximately one third of stocks have withdrawn guidance and 60% of stocks have cut or suspended their dividend.
Sector returns were mostly positive in August. The best performing sectors were information technology (15.5%), consumer discretionary (8.7%) and real estate (7.5%). These were followed by industrials (4.6%), healthcare (4.0%) and energy (3.4%) which also outperformed the broader market. Sectors that lagged included materials (1.2%), financials (1.0%), consumer staples (-0.4%) and communication services (-3.8%). Utilities (-4.8%) was the worst performing sector.
The information technology sector continued its recent outperformance, following the lead of global IT stocks. Afterpay (33.4%) continued its ascent, while Xero (12.3%) and Wisetech Global (36.5%) also significantly outperformed.
The consumer discretionary sector also outperformed during August. Aristocrat Leisure (8.4%), Wesfarmers (4.1%) and IDP Education (50.9%) were the key drivers of sector performance.
The real estate sector also outperformed the broader market, despite the challenges of COVID-19. Key contributors included Goodman Group (8.2%), Stockland (24.1%) and Scentre Group (10.8%). Stockland was the best performing real estate stock during the month, having reported strong residential sales in June and July.
The consumer staples sector lagged the broader market. It was dragged into negative territory by A2 Milk Company (-11.8%), Treasury Wine Estates (-14.4%) and Coles (-0.9%). Treasury Wine Estates was negatively impacted by an announcement from China that they are launching an anti-dumping investigation of imported wine from Australia.
The communication services sector underperformed. Sector heavyweight Telstra (-11.3%) was the key driver of underperformance. Despite meeting expectations on sales and profit, Telstra underperformed due to a lowering of expected rates of return which puts greater pressure on management to reduce costs to maintain future dividends.
The utilities sector was the worst performer in August. Sector heavyweights AGL (-7.9%) and APA Group (-5.2%) were the main detractors. APA disappointed the market after marginally missing its initial guidance, due to issues around the Orbost Gas Processing plant, which was meant to be up and running mid-FY20 but is now expected to be fully up and running by the end of FY21.