Stock Market Wrap-Up – May 2018

The S&P/ASX 200 Accumulation Index rose 1.1% during the month. The Australian equities market finished the month on a positive note despite some turmoil in offshore markets. May saw emerging markets underperform developed markets, a stronger USD and ongoing trade concerns. In major global developed markets, the UK’s FTSE 100 was the strongest market returning 2.8%, followed by the US S&P 500 which was up 2.4%. Japan’s Nikkei 225 was down 1.2% while the Euro Stoxx 50 was down 2.5%, following political uncertainty in Italy.

During the month, the Reserve Bank of Australia (RBA) maintained the cash rate at 1.50%. The RBA continues to maintain its view on the economy with global growth continuing to improve and global inflation remaining low.

The Federal Budget was released, delivering an improved deficit projection for 2018/19 and forecast of a return to surplus in 2019/20, a year earlier than expected. The Budget confirmed income tax cuts, a commitment to lower corporate taxes and a focus on infrastructure projects.

Domestic economic data releases were mixed in May. Employment grew, with 23,000 positions added in April. Meanwhile the unemployment rate ticked up a notch to 5.6%. The April NAB Survey of Business Conditions rose to reach a record high of +21. Business confidence was more muted, rising +2 to +10. Retail sales were softer in March following a flat reading for the month. Building approvals fell 5% in April, dragged lower by an 11.6% fall in high density approvals.

In stock specific news, Wesfarmers formalised its exit from the UK having announced the sale of Homebase to Hilco Capital. Healthscope underperformed having lowered FY18 guidance and announcing that it would not grant due diligence access to either of the potential suitors that put forward takeover offers in April, with the Healthscope board believing that they both undervalue the business.

Sector returns were mostly positive in May. The best performing sectors were Health Care (5.6%). Consumer Discretionary (5.1%), Real Estate (3.1%) and Materials (2.0%). Technology (1.4%), Utilities (1.1%), Industrials (1.1%) and Energy (0.2%) were also positive. Financials (-0.2%) and Consumer Staples (-0.4%) posted negative returns. Telecommunications (-10.2%) was the worst performing sector during the month.

The Health Care sector had a strong month. This was largely due to sector heavyweight CSL (9.1%) which outperformed after upgrading FY18 earnings guidance during the month.

The Consumer Discretionary sector was buoyed by Aristocrat Leisure. Aristocrat reported strong 1H18 results following strong profit growth across its Digital and North American gaming operations as the company continues to improve market share.

The Real Estate sector enjoyed broad based gains on the back of falling US 10-year bond yields. The biggest contributors to sector returns included Scentre Group (3.7%), Vicinity Centres (9.4%) and Lendlease (5.0%).

The Financials sector was again weighed down by the banks due to the ongoing Financial Services Royal Commission hearings. National Australia Bank (-4.1%) and Commonwealth Bank (-3.5%) were the worst performers. In contrast ANZ (4.3%) outperformed, having reported its 1H18 results and the sale of OnePath Life NZ.

Consumer Staples underperformed the market in May. Key detractors included Metcash (-19.4%), Treasury Wine Estates (-13.1%) and a2 Milk (-12.2%). Metcash underperformed after losing a key supply contract. Treasury Wine underperformed after suffering delays on the clearance of shipments into China. Meanwhile, a2 Milk underperformed after it fell short of guidance expectations.

The Telecommunication sector was dragged down by index heavyweight Telstra (-12.0%). Telstra announced that EBITDA is expected to at the bottom end of the forecast range for FY18. The market also reacted negatively to the risk that Telstra could cut its dividend again and the downgrade by S&P of Telstra’s long-term rating to A-.

Source: Nikko Asset Management – Brad Potter