Market Data August 2023
August saw a delicate balance between economic indicators and market sentiment play out in markets. The United States enjoyed what appears to be Goldilocks labor conditions, with strong job growth and a narrowing labor market. The country added 187,000 new jobs in August, surpassing expectations. While the unemployment rate rose slightly to 3.8%, it was due to a positive influx of new workers into the labor force. The number of unfilled jobs per unemployed person decreased, indicating a tightening labor market. Consumer confidence took a hit as the Conference Board ConsumerConfidence Index fell below expectations. The Present Situation Index andExpectations Index both declined, reflecting concerns about the future.Additionally, personal spending continued to outpace income growth, leading to a decline in savings rates. This suggests that consumers may be struggling to maintain their standard of living based on their current income levels.
The Australian stock market experienced mixed results during the reporting season. The retail sector, in particular, showcased the contrasting performances we have seen across the market in this reporting season. For example, Premier Investments saw a surge of 12.3% after forecasting near double-digit sales growth, while Breville Group experienced a nearly 10%increase in its stock price, primarily driven by strong sales of coffee machines. However, A2 Milk faced a decline of over 13% as the company flagged a slowdown in demand, influenced by falling birth rates in China.
In China, the People's Bank of China (PBoC) implemented measures aimed at stabilizing the housing market and boosting consumption.These policy measures indicate a cautious effort by Chinese authorities to support sentiment and stimulate consumption. However, concerns remained about the urgency of policy changes and their long-term impact on investor psychology.
In the Eurozone, inflation remained a topic of interest. Eurostat reported a marginal decrease in core CPI for August, with non-energy industrial good prices and services showing modest increases. Headline CPI remained unchanged, driven by higher energy prices and strength in non-energy industrial goods. These figures highlighted the ongoing challenge of managing inflationary pressures in the region.
Market Returns - 1 Month to 31 August 2023 (in AUD)
The ASX 200 fell 0.7% in August, with the FY23 reporting season delivering a higher incidence of earnings downgrades. For corporate Australia revenues held up well as demand trends were modestly better than expected, however this was more than offset by an increase in finance and wages costs that had a detrimental impact on earnings per share. It also appears to be putting more pressure on Free-Cash-Flow (FCF) as rising operating costs and capex provide the most notable headwind for resource companies.
The FY23 earnings season was particularly harsh for companies that had leveraged balance sheets at ~3x Net Debt/EBITDA, where negative price reactions were most pronounced as the full weight of higher interest costs dragged profits lower. Indeed, we expect that higher finance costs will continue to impact on earnings into FY24 as fixed rate debt rolls off into higher rates.
In an environment where the economy is showing the first tangible signs of slowing and higher operating costs persist it is unsurprising that ASX 200companies have provided cautious guidance for FY24. The market has clearly entered an earnings downgrade cycle, albeit mildly at this point, with earnings estimates being downgraded by >2% for FY24.
While negative earnings revisions have outweighed positive earnings revisions for this earnings period, it was encouraging to see a handful of companies deliver results ahead of expectations, namely: Brambles, GoodmanGroup, James Hardie, and Spark NZ.
More broadly, at a sector level, Discretionary Retail, Real Estate andEnergy were the strongest performers in August, whilst Utilities, Staples, andTechnology underperformed.
At a portfolio level this translated into cyclical companies typically outperforming defensive earning companies. Specifically, Goodman Group, PremierInvestments, and James Hardie were notable strong performing stocks. WhereasRamsay Health Care, Cleanaway Waste Management, and Telstra, weighed on performance.
In our view, the key insights from this reporting season illustrate that companies with strong market shares and conservative balance sheets are enviably better placed to strengthen their value proposition relative to companies with higher debt levels. An aversion to high debt levels has prompted us to divest several names across the portfolios that face the continued headwinds of higher finance costs.
August was an interesting month for Australian bond investors as the local market was largely sheltered from the wild swings in the US for the first time since the start of 2022. From 19 July 2023 to 21 August 2023, the US 10-year yield rose by a whopping 59 basis points while the Australian 10 year’s month was more muted, finishing August 3bps tighter than it started. Similarly, the 2-year marched higher in the US and fell locally. On the back of these moves, AusBond Composite (BACM0) Index rose 0.74% for the month, and the Bloomberg Global Aggregate (LEGATRUU) Index returned -1.37%. Duration was again slightly positive this month, with the AusBond Composite Index beating the AusBond Credit FRN (BAFRN0) Index, which returned +0.46%.
Whilst local credit markets were broadly robust, AT1 markets gave back gains. The 5-year marker for our All AT1 Index finished the month 15 basis points wider at 307bps. There was slight strength in Tier 2 markets as spreads on our All Tier 2 Index tightened by 2bps to 219bps at the five-year tenor. The predominantly floating rate nature of the AT1 index coupled with higher reference rates has provided a deeper protection against these moves in the form of higher coupons. This was the case for Prime’s AT1 exposures in August as despite the adverse spread movements, returns were either slightly negative or flat. The Prime Australian Defensive Income Portfolio returned 36 basis points for the month, in line with the Bloomberg Bank Bill Index (+37bps).
Excluding exposures to offshore bonds and AT1s, August was a solid month for the Prime Australian Defensive Income Portfolio’s holdings, all of which returned between 0.3% and 1.0%. The best performer on a weighted contribution basis was again the Metrics Direct Income Fund with +12bps (+0.93% HPR). The top performing holding was the Yarra Australian Bond Fund with a +0.95% holding period return, adding 9bps to the portfolio’s return. Return detraction was driven by -4bps from the PIMCO Global Bond Fund (-0.33% HPR) as US Yields moved higher. Transaction timing impacted the month negatively by approximately 12bps as the portfolio’s CBAPM holding was sold and the Artesian Corporate Bond Fund was trimmed by 2%, countered by a 3% increased exposure to the Yarra Higher Income Fund.
The surprising resilience of the US economy meant the S&P; 500 Index continued to outpace its developed counterparts in places like Europe, Japan and Australia. Corporate earnings held up in FY23 as demand stayed strong even whilst companies increased their prices along with inflation.
GQG Partners Global Equity Fund was the best performing asset in August, returning +4.3%. Their biggest holding NVIDIA Corporation, which has roughly an 8% weighting in the fund, contributed the majority of the return. The stock continued to beat analyst expectations and report strong earnings for the second quarter of 2023. Riding the tailwinds of the AI revolution, revenue was up 101% year-on-year and earnings per share were up 136%.
On the other side, the Trinetra Emerging Markets Growth Trust struggled in month with the lowest return at a -2.5% retraction. This was in most part due to the weakness in the Chinese economy which not only directly hurt the portfolio through Trinetra’s Chinese stock holdings, but the negative sentiment was exported throughout all emerging market economies as investors factored in a lower trade and consumption.
Finally, Hyperion’s Global Growth Fund finished the month in the green, however underperforming the MSCI World Index. The funds underperformance during a strong month out of the United States highlight their niche exposure to tech and consumer discretionary, and the narrowness of the US market at the moment.
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