The S&P/ASX 200 Accumulation Index returned 2.9% during the month. The Australian market delivered its seventh straight month of gains, outperforming global equity markets in July. Developed markets outperformed emerging markets. In major global developed markets, the UK’s FTSE 100 was up 2.2% and the S&P 500 was up 1.4%. Japan’s Nikkei 225 returned 1.2% while was the DJ Euro Stoxx 50 was down 0.1%.

The cash rate was cut by 0.25% in July to a new record low of 1.00%. Similarly to the previous rate cut, the Reserve Bank of Australia (RBA) noted that their decision was to “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target”. This action was taken in the face of challenges from the ongoing US-China trade dispute and subsequent risks to global economic growth as well as subdued domestic consumption. Later in the month the RBA governor commented further that “…it is reasonable to expect an extended period of low interest rates”.

The latest domestic economic data releases were mixed in July. Second quarter CPI came in at 0.6% on quarter, with automotive fuel the key driver, rising markedly at 10.2% on quarter. Employment growth rose a lower-than-expected 500 positions in June, while the unemployment rate continued to remain steady at 5.2%. The NAB Business Conditions index rose by 2 points to +3 in June. In contrast, Business Confidence slumped to +2 from +7. National CoreLogic dwelling prices rose 0.04% in July, marking the end of a record downturn. Retail sales were weaker than expected again, rising just 0.1% in May.

In company specific news, Adelaide Brighton downgraded guidance on the last day of the month, which saw the stock fall by 18.1% on the day. The company cited competitive pressures in Queensland and South Australia, weaker-than-expected residential and civil construction markets, as well as higher raw material costs and one-off shipping costs associated with cancelled import orders. This result has led to caution regarding the outlook for domestic cyclicals during the August reporting season.

All sector returns were positive during July. The best performing sector was Consumer Staples (9.8%). This was followed by Healthcare (5.9%), Information Technology (5.0%), Consumer Discretionary (4.8%), Industrials (3.4%), Real Estate (3.2%), Communications (2.9%), Utilities (1.9%), Financials (1.7%) and Energy (1.7%). Materials (1.0%) was the worst performing sector for the month.

The Consumer Staples sector dominated in July, driven by strong performance from Woolworths (7.2%), A2 Milk (23.6%) and Treasury Wine Estates (18.6%). A2 Milk continued to rise on the back of retail price increases, which signals management confidence in its growth outlook and has led to earnings upgrades.

The Healthcare sector was also a strong performer this month with sector heavyweights CSL (6.8%), Cochlear (6.5%) and ResMed (10.7%) the key contributors. ResMed outperformed after reporting Q4 earnings that showed solid momentum in its Sleep and Respiratory Care division.

Information Technology also outperformed the broader market with Wisetech Global (15.3%) and Xero (8.3%) key contributors to performance.

The Financials sector underperformed the market in July, weighed down by sector heavyweights AMP (-15.6%), ANZ (-1.1%) and Commonwealth Bank (-0.6%). AMP was sold off following news that the sale of AMP Life is highly unlikely to proceed on the current terms as the deal did not receive approval from the Reserve Bank of New Zealand. The aftermath of the Royal Commission also continues to weigh on the sector more broadly.

The Energy sector underperformed with Brent Oil prices falling during the month. Woodside Petroleum (-4.6%) and Oil Search (0.6%) were the key detractors in July.

While still posting positive returns, the worst performing sector this month was Materials. Sector heavyweights Rio Tinto (-4.7%), Fortescue Metal Group (-7.7%) and BHP (-1.0%) detracted from performance. Despite another rise in iron ore prices during the month, Brazil’s Vale indicating it will be increasing supply saw the market take the view that iron ore prices will fall. This view on near-term prices saw iron ore miners underperform, particularly Fortescue.

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

 

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