Read the full Month in Review Newsletter here
We have provided a brief overview of the drivers of sector returns below.
Banks that reported produced solid and reasonably good quality results but their share prices remain constrained by governance and operational outlook issues. Namely, credit growth and bad and doubtful debts, which will take some time to resolve. Bank interest margins should continue to hold up in the short term given the recent re-pricing initiatives (lowering term deposit rates & raising investor interest rates) and investors are now far more comfortable with the level of capital required post clarification from the regulators. Most major banks will report their full year results in November.
Healthcare companies reported a mixed bag of earnings and outlooks. Global hearing implant developer Cochlear was among the star performers as it indicated it expects positive momentum to carry into the new financial year. Healthcare businesses reliant on the Australian market generally reported soft earnings and outlooks for the coming year.
Telecommunications was the worst performing sector. Telstra announced that it will cut its dividend while Vocus Group fell on news that private equity firms have pulled their bid for the company.
Resources companies have benefitted from higher commodity prices, notably iron ore which has allowed miners to generate substantial cash flows that have been used to repay debt and increase dividends.
Energy has performed in line with the market as energy prices have remained broadly flat over the period. US Shale production remains elevated, which has provided a cap on the oil price and kept the market in a marginal over supplied status. We expect oil to be range bound over the short term and improvements in earnings are likely to come through cost out initiatives or increased volume.
Consumer companies had mixed results. Having struggled for the past few years, the supermarket majors (Woolworths and Wesfarmers) appear to have made the adjustments to their pricing models and offerings to better compete with a growing number of no frills rivals. On the whole traditional retailers continue to suffer in the face of weak consumer sentiment. Domino’s price was down after it failed to meet its full-year profit target and lowered its FY18 outlook. However, we see specific opportunities within the sector in companies well-placed to compete in a low cost and online world.
Capital Goods with improving conditions in the Australian resource and infrastructure space, the diverse capital goods stocks all enjoyed good results with the outlook commentary mostly positive. The pipeline of opportunities continues to grow with commodity prices holding up and State & Federal infrastructure projects being rolled out particularly in the eastern states where the population growth has been stronger.
Commercial Services enjoyed a mixed reporting period score card with the Brambles result being seen as disappointing whilst the Seek result was in line but the outlook guidance was again subdued as they invest further in their business for the long term. The balance of the sector is exposed to the resource space which is enjoying more buoyant activity levels on the back of stronger commodity prices.
Media stocks exposed to television and newspapers continue to find the sector conditions tough with advertising revenues still losing share of total ad spend while the companies continue to attack the cost line. The on-line offerings enjoyed stronger results as their market share grew and their business models enabled stronger leverage to a more flexible cost base. Ten Network was acquired out of administration by CBS late in the month, this was seen as a reasonable outcome for Seven and Nine.
Utilities The traditional utility stocks such as Spark Infrastructure and APA Group enjoyed results that were very much in line with analyst’s forecasts, which was not surprising given the nature of the industry. The largest player in the space, AGL, enjoyed a strong result and the benefit of higher power prices should continue to feed through to a strong 2018 result.
Insurance The insurance sector had a disappointing reporting period as the combination of weaker underlying margins and lower quality results placed pressure on their share prices. Both domestic and international insurers continue to find it challenging to grow their revenue lines.
Diversified Financials The larger listed fund managers had a mixed reporting period with a number of high profile managers struggling with lower levels of FUM and lower performance fees but their profits were supported by investment markets that ended up higher over the period. Other stocks in the sector that reported included: Challenger – a good result but the outlook was a little more subdued than many in the market were hoping for; and ASX – had a steady result but talked to the potential for rising capital expenditure requirements in FY19-20E.
The information technology sector performed in-line with the market. With companies that are drastically different to each other, individual performance varied. Altium, the PCB software designer, was the best performer after it reported its full year profit and re-iterated that it is still on track to double its revenues to $200 million by 2020. On the other end of the spectrum, iSentia Group, the media monitoring company, lowered its earnings guidance in the beginning of the month.
A-REITs (property) enjoyed a solid reporting season and provided a better-than-expected FY18 outlook. Most of the businesses indicated that they are still seeing strong demand across their property portfolios and the development pipeline continues to look encouraging with few instances of vacancy levels rising.
Biggest Monthly movers in the S&P/ASX 200