Stock Market Wrap-up – August 2019

The S&P/ASX 200 Accumulation Index returned -2.4% during the month.

The Australian market finally ended its winning streak in August following a mostly disappointing results season and weak performance in the Materials sector dragging down performance. Globally equity markets were also weaker, with developed markets marginally outperforming emerging markets. In major global developed markets, the DJ Euro Stoxx 50 was down 1.1%. The S&P 500 was down 1.6%, while Japan’s Nikkei 225 was down 3.7%. The UK’s FTSE 100 was the worst performer, down 4.1%.

The Reserve Bank of Australia (RBA) maintained the cash rate at the record low level of 1.00%. The RBA noted that it is reasonable to expect an extended period of low interest rates in order to make progress in reducing unemployment and achieve more assured progress towards the inflation target.

Domestic economic data releases were mixed in August. Employment growth rose a higher than expected 41,500 positions in July, while the unemployment rate remained steady at 5.2%. Retail sales exceeded expectations, rising 0.4% in June. The NAB Business Conditions index fell by 2 points to +2 in July. In contrast, Business Confidence rose to +4 from +2. National CoreLogic dwelling prices rose 0.08% in August, with strong gains in Sydney and Melbourne.

The August results season disappointed, with more misses than beats. Guidance was also softer, with FY20 earnings for large cap stocks revised lower by around 2.5%. The main positive surprise from the results was the broad-based increase in dividends. Sectorally, there were some positives to come out of the retail sector from names such as JB Hi-Fi and Super Retail Group. Meanwhile the resources sector struggled, with the miners facing wage and capex cost pressures.

The majority of sector returns were negative in August, with only four sectors managing to achieve positive returns. The best performing sector was Healthcare (3.6%) which was followed by Real Estate (2.3%), Information Technology (0.3%) and Consumer Discretionary (0.2%). Consumer Staples (-0.1%), Industrials (-2.5%), Financials (-2.6%), Utilities (-3.0%), Communication Services (-3.1%) and Energy (-5.6%) all posted negative returns. Materials (-7.5%) was again the worst performing sector for the month.

The Healthcare sector was the strongest performer this month with sector heavyweights CSL (4.9%) and ResMed (8.7%) the key contributors. CSL reported a result that was in-line with expectations and provided guidance that was above expectations as CSL is expected to take market share from a competitor who is struggling to keep up with product demand. The intention to open an additional 40 collection centres also illustrates the company’s confidence it is growth outlook.

The Real Estate sector also posted positive returns with key contributors including Lendlease (19.4%) and Scentre Group (4.2%). Lendlease outperformed after announcing it had several parties undertaking due diligence on its engineering unit, raising expectations of the long awaited sale of the troubled business unit. Lendlease also confirmed it has AUD 100 billion in projects in the pipeline. Scentre Group reported results that were in-line with expectations.

The Information Technology also outperformed the broader market with Wisetech Global (15.6%) and Afterpay Touch (15.9%) the key contributors to performance.

Communication Services underperformed the broader market, weighed down by sector heavyweight Telstra (-4.3%) which reported a 40% fall in its full year profit.

The Energy sector underperformed with oil prices falling during the month. Woodside Petroleum (-5.8%) was the key detractor. The stock was weighed down by the lower oil price and higher production costs.

The worst performing sector was Materials. Sector heavyweights BHP (-11.0%), Rio Tinto (-8.3%), and South32 (-15.9%) were the key detractors from performance as iron ore prices took a tumble during the month. Furthermore, the August results for all three stocks fell short of consensus expectations.

Source: Brad Potter, Head of Australian Equities – Nikko Asset Management