It’s Not Over Yet, but Lift the Bar on Defence

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Aussie Equities Month in Review (Oct 2018)

Putting Aussie Earnings Conviction to the Test

Aussie Reporting Season Wrap: Growth Stocks Reign Supreme

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

Australia Consumer discretionary / Thematic (Sector/Industry)

<ul>
<li>
Giving Back Reporting Season Gains. In our view, reporting season was relatively solid, with 8% EPS growth achieved in FY18 and another 8% forecast for FY19.  The market rallied through reporting season, but gave up all of these gains through September, with the return on the ASX 200 falling by 1.4%.  Growth stocks that drove the market higher during reporting season reversed course.  Stocks such as CSL, COH, APT, TWE, and ALL lost ground.</li>
<li>
Hitting Valuation Ceilings. Healthcare (-7.8%), Consumer Discretionary (-4.6%), and Industrials (-3.1%) were the weakest sectors during the month, but also the most expensive coming out of reporting season.  Telcos (5.6%) and Materials (4.6%) rallied, despite a large number of downgrades to support the broader index. </li>
<li>
Financials Under Pressure. The Financial sector fell by 2.9% and the Interim Report from the Banking Royal Commission was released on the last trading day.  Bank stocks rallied by around 1.3% following the release of the Report, probably because it provided no recommendations and merely summarised the proceedings of the Commission.  However, the Report provided a scathing assessment of Bank lending practices and was critical of the Wealth Managers.  We still think it’s too early to assess the fallout from the Royal Commission until the Final Report is released on 1 February.  Stay underweight Banks and Wealth Managers (ILF and PPT) until there is more clarity.</li>
<li>
The sell-off caused declines in short-positioning. Despite a better-than-expected FY18 result, JBH is now the most shorted stock in the ASX 200.  Lithium plays ORE and GXY are also heavily shorted along with the Bricks-and-Mortar retailers.  NXT, SDA and NEC saw the largest increase in short positions.  The largest declines were in SYR, SFR and NSR.</li>
<li>
Underperformance provides a little more valuation support. The market weakness brought some valuation relief with the 12-month forward PE ratio for the ASX 200 declining to 15.4pts from 15.9pts at the start of the month. The Healthcare, Industrials and Telcos are expensive, while Energy is cheap.  Healthcare, Materials and IT saw PE declines.</li>
<li>
Domestic Economy Tracking In-Line with Our Expectations. GDP rose by 0.9% in Q2 and 3.4% during FY18.  The lift was driven by stronger consumer and Government spending.  The orderly correction in housing continued, with Q2 house prices falling by 0.7% and we expect this to continue without disrupting the broader economy.  Political instability in Canberra pushed NAB business confidence lower, but business conditions remained well supported.  Meanwhile, the labour market added 44k jobs in August.  The yield remains steep and supportive of future growth, while there are no interest rate rises priced for the RBA over the next 12 months. </li>
</ul>



Giving Back Reporting Season Gains. In our view, reporting season was relatively solid, with 8% EPS growth achieved in FY18 and another 8% forecast for FY19.  The market rallied through reporting season, but gave up all of these gains through September, with the return on the ASX 200 falling by 1.4%.  Growth stocks that drove the market higher during reporting season reversed course.  Stocks such as CSL, COH, APT, TWE, and ALL lost ground.

Hitting Valuation Ceilings. Healthcare (-7.8%), Consumer Discretionary (-4.6%), and Industrials (-3.1%) were the weakest sectors during the month, but also the most expensive coming out of reporting season.  Telcos (5.6%) and Materials (4.6%) rallied, despite a large number of downgrades to support the broader index. 

Financials Under Pressure. The Financial sector fell by 2.9% and the Interim Report from the Banking Royal Commission was released on the last trading day.  Bank stocks rallied by around 1.3% following the release of the Report, probably because it provided no recommendations and merely summarised the proceedings of the Commission.  However, the Report provided a scathing assessment of Bank lending practices and was critical of the Wealth Managers.  We still think it’s too early to assess the fallout from the Royal Commission until the Final Report is released on 1 February.  Stay underweight Banks and Wealth Managers (ILF and PPT) until there is more clarity.

The sell-off caused declines in short-positioning. Despite a better-than-expected FY18 result, JBH is now the most shorted stock in the ASX 200.  Lithium plays ORE and GXY are also heavily shorted along with the Bricks-and-Mortar retailers.  NXT, SDA and NEC saw the largest increase in short positions.  The largest declines were in SYR, SFR and NSR.

Underperformance provides a little more valuation support. The market weakness brought some valuation relief with the 12-month forward PE ratio for the ASX 200 declining to 15.4pts from 15.9pts at the start of the month. The Healthcare, Industrials and Telcos are expensive, while Energy is cheap.  Healthcare, Materials and IT saw PE declines.

Domestic Economy Tracking In-Line with Our Expectations. GDP rose by 0.9% in Q2 and 3.4% during FY18.  The lift was driven by stronger consumer and Government spending.  The orderly correction in housing continued, with Q2 house prices falling by 0.7% and we expect this to continue without disrupting the broader economy.  Political instability in Canberra pushed NAB business confidence lower, but business conditions remained well supported.  Meanwhile, the labour market added 44k jobs in August.  The yield remains steep and supportive of future growth, while there are no interest rate rises priced for the RBA over the next 12 months. 


Aussie Equities Month in Review (Sept 2018)