The S&P/ASX 200 Accumulation Index was up 0.7% during the month. The Australian market lagged global equity markets following a volatile domestic reporting season. Global equities had a good start to the month but as geopolitical tensions grew over North Korea’s missile testing, markets went into ‘risk off’ mode.
Emerging markets again outperformed developed markets in August. In the US, the S&P 500 finished up 0.3% after reaching new all-time record highs in August. The UK’s FTSE 100 was up 1.6% while Europe underperformed, with the Euro Stoxx 50 down 0.7%. Japan was the laggard with the Nikkei 225 down 1.3% during the month.
During the month, the Reserve Bank of Australia (RBA) maintained the cash rate at 1.50%. The RBA noted that the improvement in global economic conditions had continued, particularly in China and the euro area. It believes that domestic business conditions had improved further with faster growth in non-mining business investment expected. The RBA sees the local labour market continuing to improve however they remain concerned over the outlook for consumers as they face low wages growth and elevated levels of household debt.
The latest domestic economic data was generally upbeat, with retail sales for June growing a stronger than expected 0.3%. The data on wage costs showed a 0.5% gain in Q2, which was in line with expectations. Employment for July posted another strong gain, rising by 27,900 positions. The unemployment rate fell to 5.6% in July, from an upwardly revised 5.7% in June. The NAB business confidence survey was higher at +12 in July. Building approvals also rose in June by 10.9% due largely to a 20% increase in apartment approvals.
The August reporting season yielded mixed results. Oil & Gas stocks boosted the Energy sector as a number of stocks delivered strong earnings upgrades. Materials also had a favourable month after reporting strong cash flows and upgraded guidance. In contrast, Telecommunication stocks, the Insurers and Banks disappointed, as did Retail and Media. Some of the key themes to emerge from reporting season were declining payout ratios, rising capital expenditure and increasing cost pressures.
Sector returns were mixed during the month. The Energy sector was the best performer, up 5.7%. Consumer Staples (5.3%), Industrials (4.6%), Materials (4.4%), Utilities (3.1%) and REITs (1.3%) also outperformed the broader market. Sectors that lagged included Healthcare (0.3%), Consumer Discretionary (-1.5%), Financials ex-REITs (-2.2%) and Telecommunications (-7.4%).
The Energy sector boasted better-than expected results during the reporting season. A number of major stocks reported upgraded production guidance, further debt reduction and improving operational leverage. There were strong earnings upgrades for key energy stocks resulting in outperformance during the month. Santos was up 10.6%, Origin Energy (10.5%), Oil Search (1.1%) and Woodside Petroleum (0.9%).
Key drivers of returns in the Consumer Staples sector were Wesfarmers (7.6%) and Treasury Wine Estates (20.0%). Wesfarmers results were well received by investors, with the market focusing on the better-than-expected results for Coles and the upside for Bunnings. Treasury Wine Estates was one of the best performing stocks during the month as gross margins improved on falling costs and strong volume gains.
The Industrials sector also outperformed, boosted largely by transport stocks. Key outperformers included Qantas (7.5%), Sydney Airport (10.0%) and Transurban Group (6.6%) after each delivered solid results.
The Consumer Discretionary sector underperformed during August, dragged lower largely by retail stocks where cautious guidance and a lack of conviction regarding the outlook was a common feature. Stocks that disappointed the market included Harvey Norman (-6.6%) and JB Hi-Fi (-9.4%).
Financials ex-REITs underperformed as sub-sectors posted mixed results. Diversified financials were the big winners after posting strong results. Outperformers included IOOF (12.6%), Platinum (11.8%), Perpetual (8.8%) and Janus Henderson (4.6%). The major banks generally underperformed. Commonwealth Bank (-6.7%) was the key laggard after action was taken against the bank for contravening the Anti-Money Laundering & Counter Terrorism Finance Act by not reporting cash deposits greater than $10,000 through its ATMs dating back to 2012. The major insurers also underperformed following weaker-than-expected results from the general insurers. Insurance Australia Group (-3.9%), QBE Insurance (-10.1%) and Suncorp (-6.0%) were all lower.
The Telecommunications sector was the worst performer, dragged lower by sector heavyweight Telstra (-6.6%). Telstra reported results that were slightly below market expectations however it was the dividend cut which disappointed investors the most. Vocus Communications (-33.8%) also suffered during the month after two private equity suitors walked away from takeover talks.
