Economic Review
Global Equity Markets
Global shares delivered a solid, positive return in July.
US shares made strong gains given expectations for continued strong corporate profit growth and positive economic activity. US economic growth was 4.1% annualised for the June 2018 quarter and the strongest since 2014. America’s labour market continues to generate robust jobs growth with a low 4% unemployment rate. Both US business and consumer surveys continue to show high confidence results.
European shares rebounded in July with a truce in President Trump’s trade war. The White House meeting between the European Commission head and President Trump on 26 July 2018 alleviated concerns that the trade war was set to intensify. Both Europe and the US have agreed to place on hold new tariffs and start talks on reducing trade barriers. European economic data was modestly positive with solid business surveys.
However Italy remains a key concern with subdued economic growth and a new Coalition government pledging to implement contentious budget spending and anti-immigration proposals.
Asian share markets made more modest gains. Chinese shares edged higher in July with hopes for future government stimulus to counter the trade threat to Chinese exports as well as slower domestic demand. China’s economic activity continues to soften with milder results recorded for industrial production and retail spending in June 2018.
Table 1: Global share market performance – June 2018
US S&P 500 +3.6%
US Dow Jones +4.7%
Euro Stoxx 50 +3.9%
German DAX +4.1%
UK FTSE 100 +1.5%
Japan Nikkei 225 +1.1%
China Shanghai Composite +0.8%
Source: Factset, IRESS
Australian share market review
Australian shares posted a mild gain in July. The Telecommunications sector (7.9%) made a strong comeback after a run of poor returns given intense competitive pressures. There were also solid gains for industrials (3.5 %). However the Information Technology (-1.2 %) and Utilities sectors (-1.4 %) disappointed, the latter on concerns over the impact of the proposed rules by the ACCC to rein in power prices. These are expected to cap growth and expose the major participants to more competition.
The S&P/ASX 200 Accumulation Index rose by 1.4%, with industrials outperforming resources for the month.
The Australian dollar (AUD) moved up slightly against the US Dollar (up from US74.05 cents to US74.24 cents) and Euro but made solid gains against the Asian currencies. Positive Australian economic data appears to have been the key driver for the AUD outperformance over the Chinese and Japanese currencies.
Table 2: Australian share market performance – June 2018
S&P/ASX 200 Accumulation Index +1.4%
S&P/ASX 200 Industrials Accumulation Index +1.7%
S&P/ASX 200 Resources Accumulation Index +0.1%
S&P/ASX Small Ordinaries Accumulation Index -1.0%
S&P/ASX 200 A-REIT Accumulation Index +1.0%
Source: Factset, IRESS
Large Caps (S&P/ASX100)
CIMIC Group (+14.3%), TPG Telecom (+11.4%), and Brambles (+11.3%) were the best performing large cap stocks during July.
- CIMIC Group (CIM) – CIM reported interim results that exceeded market expectations. First half NPAT of $363mn was 12% ahead of the pcp and statutory revenue and EBITDA were each 11% ahead.
- TPG Telecom (TPM) – with the sector looking relatively cheap at the end of June (12.3x forward earnings) in comparison to history, and other sectors in the Australian market, TPM posted the strongest sector performance.
- Brambles (BXB) – As a global operator, BXB has benefitted from a generally stable Australian dollar as well as continued economic improvement across most countries.
The worst performing Australian large cap stocks during the month were Evolution Mining (-20.5%), A2 Milk Company (-8.8%) and Carsales.com Limited (-7.8%).
- Evolution Mining (EVN) – EVN’s 4QFY18 production result revealed that although production was in line at 202.3koz of gold, costs were significantly higher than expected.
- A2 Milk (A2M) – A2M announced revenue for FY18 which was slightly above the top end of guidance and 68% ahead of the previous year. However the company flagged investment in marketing as a percentage of sales would increase and it would incur one off costs associated with CEO transition.
- Carsales.com (CRZ) – CRZ was not immune from the global pullback in technology stocks as investors seemed to question elevated valuation levels..
Listed property
The S&P/ASX 200 A-REIT Accumulation Index rose by 1.0% in July underperforming the S&P/ASX 200 Accumulation Index by 0.4%. All sectors posted increases with Industrial the strongest sector (+3.4%) followed by Office (+2.0%) and Retail (+0.9%).
Stockland (SGP) and Mirvac (MGR) both performed strongly during the month after refining their FY18 earnings guidance to the top of their guidance range. Blackstone’s $5.15 cash offer for Investa Office Fund (IOF) was deemed to be “not fair, but reasonable” by independent expert KPMG.
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