Stock Market Wrap-Up – October 2017

The S&P/ASX 200 Accumulation Index was up 4.01% during the month.

The Australian equities market posted its best monthly performance in the year-to-date. Global equity markets rallied as improving economic growth, a better-than-expected US reporting season and greater confidence around US tax cuts helped drive markets higher.

Globally, Japan’s Nikkei 225 led gains, finishing up 8.2% in October. In the US, the S&P 500 was up 2.3%. The Euro Stoxx 50 was higher also climbing 2.3%. The UK also posted positive returns with the FTSE 100 up 1.8%.

During the month, the Reserve Bank of Australia (RBA) maintained the cash rate at 1.50%, noting that the improvement in global economic conditions had continued. The RBA believes that the current and future strength in employment growth in Australia is expected to support household spending in the period ahead, although slow growth in real wages and high levels of household debt are likely to be constraining influences.

The latest domestic economic data was generally positive in October. Labour market indicators were the standout this month with employment for September rising 3.1%, the fastest rate of growth since early 2008. The unemployment rate dipped slightly to 5.5%. Retail sales declined 0.6% in August. CPI for Q3 was weaker than expected, at 1.8% for the year-to-September.

The Australian market was largely focused on Annual General Meetings and bank reporting season. In stock specific news, Hong Kong based fund manager Janchor Partners Limited disclosed it had acquired a 6.4% stake in Vocus Group, boosting the share price by 10.2% on the day. Blackmores was the best performing stock during the month, surging 35.4% on the back of a well-received 1Q18 result.

All sectors were positive over the month. The best performing sectors were Energy (6.5%), Consumer Discretionary (6.2%), Health Care (5.5%) and Utilities (5.0%). Consumer Staples (4.9%), Materials (4.5%) and Industrials (4.2%) also outperformed the broader index. Sectors that lagged the broader market included Financials ex-REITs (3.2%), Telecommunications (2.4%) and REITs (2.2%).

Energy was the best performing sector, driven higher by the rising oil price. Oil prices firmed as OPEC members reaffirmed commitments to production cuts. Woodside Petroleum (5.6%), Santos (11.9%) and Origin Energy (6.2%) were the biggest drivers of outperformance.

The Consumer Discretionary sector outperformed driven by gains in Aristocrat Leisure (12.1%). Aristocrat benefitted from the release of the September quarter Eilers Fantini Slot Survey indicating that the company continues to take market share in the gaming operations market in the US. Within the sector Mantra Group (22.3%) also had a strong month, having received a takeover offer from Accor S.A.

The Health Care sector outperformed on the back of strong returns from Resmed (11.2%) and Healthscope (17.4%). A number of stocks were buoyed during the month as a result of Government support for the Private Health Insurance sector, via prosthesis reform and incentives for younger members to join earlier.

Financials ex-REITs lagged the broader market, largely driven by the banks. Commonwealth Bank (3.2%), National Australia Bank (3.7%) and Westpac (3.4%) were the key contributors, while the ANZ (1.1%) lagged having disappointed the market with its FY17 result. Macquarie Group (8.2%) also contributed to sector returns having reported a strong 1H 2018 result that was well above market expectations and also included an AUD 1 billion buyback.

The Telecommunications sector lagged the market, driven by sector heavyweight Telstra (1.4%). The Telstra share price returned to positive territory following a number of negative months. Vocus Group (20.5%) rebounded in October after a Hong Kong based fund manager disclosed it had acquired a 6.4% stake. The stock was also buoyed by news of the proposed sale of its New Zealand business as part of the company’s strategy to sell non-core assets and cut debt.

The REIT sector had a mixed month, despite the move lower in bond yields, but was largely dragged down by Lendlease (-9.5%). Lendlease issued a construction profit warning at its 1H18 results. Offsetting the losses in the construction business, the company announced that the development and investment management businesses had improved and this is expected to lead to a stronger 2H result, however this aspect of the result was largely ignored by the market.