Stock Market Wrap-Up – February 2018

The S&P/ASX 200 Accumulation Index was up 0.36% during the month. The Australian equities market outperformed major markets in February despite dropping 193 points early in the month – the worst single day fall since September 2015. The outperformance was in part due to a strong domestic reporting season which saw more companies exceed expectations than miss. Earnings revisions were the strongest they have been for many seasons. Rising capital expenditure and escalating cost pressures remained key themes, as were buybacks.

A surge in the US 10-year Treasury yield upset global equity markets early in February, as did a strong employment report in US. This saw the S&P 500 fall by as much at 10% before recovering to end the month down 3.9%. Amongst other developed markets the Euro Stoxx 50 was down 4.7%, Japan’s Nikkei 225 was also down 4.5% whilst the UK’s FTSE 100 returned -4.0% in February. Emerging markets underperformed developed markets during the month.

In February, the Reserve Bank of Australia (RBA) maintained the cash rate at 1.50%, for the 18th consecutive month. The RBA continues to maintain its view on the economy with global growth continuing to improve. With the synchronised nature of the pick-up in growth globally, in some cases to above-trend rates, this has led to more confidence that inflationary pressure will increase. The RBA’s forecast for the Australian economy is for GDP growth to increase to marginally above 3% over the next two years and for CPI inflation to be above 2% in 2018.

The latest domestic economic data continued to improve in February, with the global economic backdrop remaining favourable for the Australian economy. The wage price index increased 0.6% in the December quarter with the majority of the increase coming through the public sector. Social Services and Healthcare were the strongest sectors for wage growth. Employment grew by 16,000 positions in January and the unemployment rate remained unchanged at 5.5%. The NAB Survey of Business Confidence increased 2 points to +12, while NAB business conditions in January increased 6 points to +19, well above the five-year average. Retail sales fell sharply in December, down 0.5% following November’s unexpected surge.

In stock specific news, A2 Milk surged 47.5% after reporting strong growth in earnings and market share at its interim result. Meanwhile Myer fell 31.3% following company reporting which showed a deterioration in trading during the first quarter and no expectation of improvements in 2H18. In addition Myer announced its existing Chief Executive Officer, Richard Umbers, has resigned.

Sector returns were mixed over the month. The best performing sectors were Health Care (7.0%), Consumer Staples (2.2%) and Information Technology (1.7%). Financials (0.6%) and Materials (0.4%) also outperformed the Index. Laggards included the Industrials (-0.4%), Consumer Discretionary (-1.5%), Energy (-3.7%), Real Estate (-1.9%) and Utilities (-1.7%) sectors. The Telecommunications (-6.2%) sector was the worst performing sector during the month.

CSL (11.4%) was the key driver of the Health Care sector’s outperformance. CSL reported very strong 1H18 results during the month, driven by its flu vaccines and the Behring business. CSL also upgraded FY18 guidance with net profit after tax expected to be USD 1.55-1.60 billion from USD 1.48-1.55 billion.

The Consumer Staples sector outperformed the broader index, driven largely by the surge in A2 Milk which rallied 47.5% in February having reported first half results that exceeded expectations.

The Information Technology sector was driven higher by Computershare (8.0%). The stock rallied during the month having released a better-than-expected first half result on higher revenues and upgraded FY18 earnings guidance.

The Real Estate sector again lagged the market as interest rate sensitive sectors came under pressure due to rising bond yields. Despite strong outperformance from Lendlease (14.8%), sector heavyweight Scentre Group (-4.8%) dragged the sector lower. The stock fell sharply early in the month on rising bond yields and despite releasing full year results later in the month that pleased investors, it was not enough to recover the losses.

The Utilities sector underperformed, also impacted by rising bond yields. The main detractor in the sector was AGL Energy (-4.4%). AGL underperformed despite delivering a first half result that saw 27% growth in underlying net profit after tax, driven primarily by higher electricity prices and maintaining full year guidance. The market has instead focused on the prospects of declining profitability on the back of elevated competition in the retail market.

The Telecommunications sector was the worst performer, driven by sector heavyweight Telstra (-5.7%). Telstra released a first half result that saw strong mobile subscriber growth and profits, however there was also plenty of evidence of the heightened competition being seen across the telecommunications space and the stock subsequently suffered.