The ASX200 Accumulation Index increased slightly in August 2017 as the local market digested the reporting season.
The major macro moves continued to be found in the commodity markets with iron ore rallying a further (+4.7 per cent to US$76.50), gold (+3.3pc to US$1311) and copper (+8.4pc to US$3.10/lb). Aluminium, nickel and zinc also rose considerably on supply constraints coupled with increasing optimism on the synchronised global economy.
The Australian dollar range traded in spite of the commodity price increases, with the major mover being the Euro against all major currencies especially the British Pound, which weakened as the enormity of the Brexit negotiating gap between the EU and the UK became apparent.
Reporting season proved to be uninspiring at an index level but provided plenty of action at a stock level.
Guidance was marginally disappointing with 2018 EPS estimates falling 1-2pc for the market overall. By sector the best performers were Energy (+5.7pc led by STO and ORG), Consumer Staples (+5.3pc led by TWE), and Materials (+4.4pc led by BHP) with Telco’s (-7.4pc both TLS and VOC had poor results), and Financials ex-REITS (-2.2pc led down by CBA, QBE and SUN) being the worst. Offshore earners (with the notable exception of TWE) continued their disappointing run due to operational problems and the Australian dollar’s strength. This came in spite of falling yields globally, which traditionally underpin growth/high P/E stocks.
Despite the relatively underwhelming reporting season, the market has continued to trade in a tight range. Why has the market remained so resilient? We believe that demand for yield remains as cash levels among investors are relatively high. Dips have been, and will continue to be bought, especially where high yielding stocks (if dividends are deemed to be sustainable) are concerned. Australian shares as an asset class have, and will, probably continue to underperform other equity markets, but will not fall materially while those markets rally. Sector rotation has been the predominant theme so far this year and we believe that, while fixed interest markets have become less of a factor for equity markets, this is evolving to single stock picking. Reporting season has provided ample evidence of that.
At a stock level Orora (ORA) bounced sharply after reporting a better than expected result. The market was cautious on the energy crisis in Australia impacting on the operating cost.
However, ORA delivered underlying double-digit earnings helped by operating efficiency, which off-set some of the energy costs.
The result demonstrates Orora’s continued resilient operations in Australia, prior acquisitions performing to expectations and integrations on track and growth viability in the US.
Evolution Mining (EVN), following a strong Q4 operational update in July, EVN delivered a FY17 result in line with consensus expectations.
Importantly, EVN remains firmly on the path to de-gearing with the balance sheet now at Net Debt/EBITDA of <1x, with the potential for a net cash position in CY18. As a result management has increased its dividend payout policy to 50pc.
BHP Billiton (BHP) delivered a result where positive cashflow from higher commodity prices left the balance sheet in a position where the likelihood of further capital returns to shareholders remains.
The company also declared its US onshore assets non-core, and began a process to exit these assets.
We believe this is a positive development given their sub optimal returns.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. NAB owns JBWere Limited.
