September, 2023
For the month the portfolio returned -2.67% outperforming the benchmark by +0.22%, resulting in the portfolio returning 1.24% for the quarter ending 30 September, +2.09% ahead of the benchmark.
Seven Group Holding (+11.2%) continued to perform strongly following a solid full year 2023 result in August which showed ongoing signs of operating momentum in its core Coates and Westrac businesses, and investment in Boral. We expect solid earnings growth over the next few years to continue to be underpinned by the ongoing turnaround in the Boral business and sustained demand for mining parts/ service at Westrac given aging fleet and rebuild activity.
Seven Group has also signalled plans to take a more active approach in managing its 28.5% investment in Beach Energy. Ryan Stokes recently announced he will re-join the board and this coincided with Brett Wood being appointed CEO starting in the new year. Brett is an experienced oil and gas executive from Santos who we know, and who has a strong engineering and geo-science background and track record in project delivery. This should help in providing greater focus and supervision to the Watsia project, which has been a repeated source of disappointment over the last few years with reserve downgrades, sub-contractor issues and start-up delays in bringing the gas processing plant on-line. We increasingly see a path to latent value being unlocked over the next 12 months as the Watsia project is derisked.
QBE Insurance Group (ASX: QBE +6.9%) also performed well during the month being a perceived beneficiary of rising bond yields and potential for interest rates to be higher for longer. Over 50% of QBE’s investment book is in corporate bonds which have been less impacted than longer dated Treasuries, and in an environment of sustained higher rates this is positive for insurers. When combined with the benefits from the hardening of the premium rate cycle and improving underwriting conditions this continues to be supportive for higher returns and the insurance sector.
Treasury Wine Estates (ASX: TWE +3.4%) also outperformed during the month on continued speculation that the Chinese tariffs on Australian wine could be relaxed following the recent decision to remove duties on Australian barley. We currently don’t assume any tariff removal by China in our forecasts, but should it happen and TWE is able to regain half of the 300k cases it lost over the next 3 years, we estimate it would add around 12-15% to group earnings.
During the month Treasury also announced that CFO Matt Young would be replaced by Stuart Boxer. Mr Baxter is an experienced executive with strong listed financial and strategy experience who prior to joining TWE we have known through his roles as Executive General manager of Strategy at DuluxGroup and as CFO at South Cross Broadcasting.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-19.pdfAugust, 2023
In August the ASX300 Accumulation returned -0.76% after rallying 3.0% from intra-month lows, outperforming most global indices including the S&P500 which lost 1.5%.
Notably Industrials outperformed Resources by 1.5% with Consumer discretionary the best performing sector returning 5.7% over the month. REITs (+2.3%) also outperformed on Goodman Group rallying (+12.9%) after tapping into the artificial intelligence narrative and highlighting its pipeline opportunity for developing data centres.
Consumer Staples (-3.2%) was the worst performing sector driven by a weaker result from Coles Group (-11.2%) on the back of cost pressures and theft, and Endeavour (-8.7%). Materials (-2.1%) also lagged with resource stocks weaker from ongoing concerns around the slowdown in the Chinese economy and lack of policy stimulus.
The July Chinese data was unequivocally weak with negative year on year inflation, another month of declining property prices and the lowest monthly RMB loan growth to the real economy since 2006. Perhaps more concerning for confidence is the lack of transparency and growing pattern of the Chinese Government suspending or not reporting weak economic data: the youth unemployment series was suspended in July after the 16–24-year-olds rate climbed to 21% in June, land sales have not been published in 2023 after volumes dropped 53% in 2022, and March consumer confidence numbers were released in May and April numbers in August. This is adding to questions about the state of China’s economy and whether its weaker than the headlines suggest.
The spark for the rally in Australian equities from intra-month lows was correlated with the more dovish domestic July CPI print at 4.9%, and better than expected retail sales numbers. The inflation data provided further confirmation that tradable/ goods inflation has slowed (from a peak of 9.9% in December to just 1.7% in July).
However, non-tradable/service inflation remained relatively sticky (at 6.5% in July, although down from its cycle high of 7.7%). The 6% increase in electricity prices was the surprise reading in the CPI numbers and coupled with the resurgence in the oil price (23% in the last quarter) has potential to disrupt the recent downward trend in inflation over coming months, adding to the noise around whether rates have peaked.
The US driving season typically results in an uptick in the oil price at this time of year, but geo-politics appears to also be playing its part, as always. A less publicised, but notable development during the month was the decision at the BRICS countries summit in Johannesburg to invite Saudi Arabia, Iran and the UAE to join the BRICS alliance.
This is potentially a significant development as the BRICs countries will now control 42% of the world’s oil exports (up from 14% currently). In addition to this the new group of 11 BRICs countries will account for 68% of coal production, 38% of natural gas production and 46% of the world’s population. This has potential to exert more influence on commodity prices, but also has longerterm implications for inflation, shifts in global trade patterns and the US dollar. The full implications are hard to predict.
However, it adds further weight to the argument the international rules-based order is under threat, we are past peak globalisation, and the world is shifting to an era of ‘spheres of influence’ and alliances built around economic resilience and national security: arguments supporting a higher inflation regime.
Moving from the big picture to more domestic and stock specific news, reporting season dominated proceeding during the month. Overall, beats versus misses were broadly in line with longer term averages, but an improvement on the last few halves. However, the results showed a discernible slowdown in in overall sales growth in the last 6 months (8% versus 12% in Jun-Dec-23), operating margins contracted modestly (approximately 2% drag on earnings on average) and aggregate earnings were downgraded by about 6%.
Higher labour and wage costs were a feature of many company results, but the full impact was helped by falling input prices (particularly freight, commodity inputs). The increase in financing costs from higher rates, was unsurprisingly also a feature of reporting season, and we expect will continue to be an earnings headwind as the benefits of those companies that have fixed their debt at lower interest costs continues to roll-off.
The share price movements around results were more volatile than usual. According to Goldman Sachs circa 15% of companies that reported saw share prices move +/-10%, double the long-term average, and valuation multiple expansion explained approximately 85% of the gains for companies that rallied greater than 10%. This speaks to positioning being a bigger driver than fundamentals, consistent with investors being too negative about the economy and consumer discretionary and cyclical stocks tending to do better than the more defensive sector like staples and healthcare names.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-18.pdfJuly, 2023
In July the ASX300 Accumulation rose 2.98% after rallying 5.8% from intra-month lows. Energy (+8.8%) and Financials (+4.9%) led the way while healthcare (-1.5%) was the worst performing sector for a second month in a row (weighted down by CSL continuing to underperform following its lowerthan-expected FY24 guidance in July) and Staples (-1%) lagged.
Softer inflation prints both in the US and Australia during the month supported the narrative that monetary tightening is working, central banks are close to being done in raising rates and there is a lower risk of central banks overtightening and potential soft landing (no recession).
The decision by the RBA to keep rates on hold at 4.10% at its July and August meetings adds weight to the view there is sufficient tightening in the system, and it will take an accumulation of economic surprises to force the RBA back to the table.
Sifting through the economic noise, one thing that has been consistent is the strength of the labour market, which has been incredibly resilient. In June Australia’s employment-to-population growth hit record highs with the unemployment rate remaining steady at 3.5%. Strong rises in full-time employment and hours worked further suggests Australians looking for more hours work to meet rising costs of living pressures are still able to do so.
While softening in the leading economic indicators is yet to show up the economic data, there are signs the household sector is finally starting to feel the pinch from 12 rate hikes in short order. Retail sales in June fell 0.8% month-on-month and credit growth showed a material slowdown increasing only 0.2% month-on-month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-17.pdfJune, 2023
The portfolio returned 1.02% (net) during the quarter outperforming the benchmark by +0.03% but struggled to keep pace over the 12 months to 30 June returning 9.91%.
By historical standards the market rally over the last 12 month has been ‘narrow’ with 75% of the ASX Index performance driven by the Materials, Financials, and IT sectors.
Looking ahead into the second half of 2023 we expect financial conditions will continue to tighten due to higher interest rates and living costs. This is likely to result in an uneven economy and ongoing earnings and returns dispersion, necessitating being selective and active in managing the portfolio and focusing on quality businesses and their fundamentals, rather than trying to predict macroeconomic outcomes.
The US construction boom, energy transition, Australia’s surging migration and persistence in inflation are providing strong tailwinds and investment opportunities for a number of companies in the portfolio despite the broader economic uncertainty, which we discuss further in this report.
In the June quarter NextDC, James Hardie and AUB Group contributed strongly, while BHP, IDP Education and Treasury Wine Estates were the major detractors.
During the quarter we added AUB Group to the portfolio and added to existing positions in Genesis Minerals, QBE Insurance and Worley.
A narrow market rally & AI euphoria It is fair to say, equity markets have been incredibly resilient in the face of monetary tightening, with individual stock positioning key in driving portfolio returns given the high level of sector returns dispersion.
By historical standards the market rally has been ‘narrow’. This has been most evident in the US, with the Nasdaq and S&P500 up 32% and 16% respectively in the last 6 and 12 months, and five mega cap technology stocks (Apple, Microsoft, Nvidia, Amazon and Meta) in the S&P500 accounting for 62% of Index performance. This is down from 88% since the beginning of June, but still very skewed.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-16.pdfMay, 2023
For the month the portfolio returned -2.29% outperforming the benchmark by +0.24%.
NextDC (+11.1%) was the largest contributor to performance during the month after it announced a $618m 1:8 underwritten entitlement and details around its plans to expand regionally outside Australia into the Malaysian and New Zealand markets. As part of the announcement NextDC also announced the acceleration of the fit out of its existing Sydney S3 data centre and upgraded FY23 guidance with revenue now expected to be between $350-360m (previously $340-355m) due to higher power utilization, with EBITDA to be in the range of $192m to 196m (previously $190m to $198m).
After years of preparing the market for offshore expansion it is little surprise to see NextDC move offshore. Entering new markets is not without risk, but we see it as a credible strategic move given the attractive fundamentals of these markets and demand being led by existing customer growth.
Worley (+7.9%) held its annual investor day during the month focusing on the opportunity it has in Energy Transition to support a double-digit medium term earnings growth target.
We increasingly see a natural adjacency for Worley to leverage its skills, client relationships and project experience in helping solve the challenges in transitioning to more sustainable lower carbon technologies. This includes planning and supporting the development of industrial hubs, decarbonising existing assets, green hydrogen, carbon capture and storage, offshore wind, power networks, sustainability advisory and environmental consulting.
To capitalise on this opportunity Worley has made an early strategic shift to invest $100m in scaling up and building out its sustainability consultancy capability and capacity, with the aim of 75% (currently 32%) of its sales being from sustainability projects by 2026.
Importantly, there is also growing evidence Government policies and regulations are starting to create the right environment for Worley’s customers to invest. The US Inflation Reduction Act (IRA) has been instrumental in seeing a shift in attitude and behaviour by many of Worley’s customers to commit to lower carbon technology projects.
The European New Green Deal, UK Energy Security Plan and Canadian renewable tax credit initiative show further commitment that Governments are becoming more serious in funding the energy transition.
If the latest estimate by the Global Energy Transitions Commission in their ‘Financing the Transition’ report, that around $3.5 trillion a year of capital will be needed on average between now and 2050 to build a net-zero global economy, we see strong tailwinds and opportunity for Worley given its global scale and competitive advantages.
The growth in sustainable work for Worley is coming off a low base and it is still relatively early days. But the Investor Day highlighted there is growing momentum in the key operating indicators around growth in headcount, backlog and sales pipeline. Sustainability work is also outpacing work in traditional markets, and now represents 40% of the backlog, and supports the target of having 75% of its sales coming from sustainability work by 2026.
We see the combination of better market growth through a potential four-fold increase in global energy investment and decarbonisation projects, ability to take share and fixed cost leverage driving a 10-year earnings per share compound annual growth of around 10%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-15.pdfFebruary, 2023
From a portfolio perspective it remains important to focus on what we can control and stock fundamentals. The February reporting season provided an opportunity to get a report card on portfolio holdings and insight in the general health of corporate Australia.
Overall, the results season showed corporate earnings have proved relatively resilient in the face of rising inflation and tightening monetary policy, at least to now. There were few signs of any significant slowdown in sales with greater than 80% of companies meeting or beating revenue expectations. Price rises have helped maintain top line growth, even where there has been some softening in demand starting to creep in. However, at the earnings line there was growing evidence of margin pressure with nearly 50% of companies missing expectations (versus ~30% long run). That said, many companies suggested that input costs have peaked and are starting to ease given falls in commodity prices and supply chains easing. Labour costs were generally the exception with labour markets remaining tight (particularly in mining and construction) and little discussion of laying off staff (as distinct from the recent US quarterly reports). Given how hard it has been to attract staff, there seems a general willingness to still hoard labour at this point.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-14.pdfDecember, 2022
December saw somewhat of a reversal of the bear market rally of the last few months. The S&P/ASX300 Accumulation Index closed down -3.3% for the month, after rallying 12.5% in October and November, resulting in the Australian market closing down -1.77% for the year. This was well ahead of the US S&P500 which declined 5.9% in December and closed down 19.5% for the year.
All sectors were negative in the month with Discretionary (-7.0%), Property (-5.6%) and Technology (-5.4%) falling the most, while Resources (-0.9%) Consumer staples (-1.9%) and Utilities (-2.2%) relatively outperformed.
Across the ASX300 Energy (+49%), Utilities (+31%), Materials/Resources (+13%) and Financials (+2%) were the only sectors to post positive returns in the last 12 months, with Technology (-32%), Discretionary retail (-20%) and Property (-19%) the worst performing sectors. Needles to say, it was an extreme year in terms of returns dispersion.
A growing feeling inflation may have peaked combined with growing hope the US may avoid a recession have been the catalysts for the recent bear market rally. However, the hawkish December US Federal Reserve FOMC meeting, and a surprise change to Japanese monetary policy, dampened sentiment and with it weighed on equity markets.
The all-important US 10-year Treasury bond yield ended the month at 3.87%, 46 basis points down from its 2022 peak of 4.34% reached in October, though up 47 basis points from the recent low of 3.40% in early December.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-11.pdfNovember, 2022
For the month the portfolio returned 4.38% (after fees) underperforming the S&P/ASX300 Accumulation Index by -2.11%. During the month we sold out of TPG Telecom. We initially entered the stock earlier this year, but the recovery in global roaming, a key earnings driver has been slower to play out than expected. Further, the company has increased its guidance around the investment in the business and seen a material increase in its interest expense due to rising rates on its floating debt. The positive fixed cost leverage we originally invested for has been diluted and balance sheet become more challenging making the risk/reward less compelling.
Further, the deferral of the ACCC decision on regional infrastructure sharing arrangements with Telstra, has been deferred to the end of this year with both parties likely to appeal any decision creating a headwind to performance
We also sold out of Lendlease during the month following the company strategy update, where it downgraded its 2023 financial year guidance targets primarily due to lower than expected activity across its business and a more challenging macro outlook. Management also advised they plan to pivot the portfolio towards investing more capital in its funds management investment business over developments resulting in lower construction earnings and a lower return on equity. This will result in a lower recycling of capital and has necessitated the need to reduce the dividend payout policy. The risk is in a rising rate and slowing economic environment the recovery in earnings has been pushed out yet again and risk-reward declined. The stock looks attractively priced versus history, but we see better opportunities to deploy capital elsewhere in the current environment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-10.pdfOctober, 2022
For the month the portfolio returned 5.02% underperforming the S&P/ASX300 Accumulation Index by -0.94%. BHP, National Australia Bank, Chorus and Woodside Petroleum were the best performers for the month, whilst Cooper Energy, BHP and Megaport were the largest detractors.
We put some cash to work during the month adding to our gold position through Northern Star Resources (NST) and to Johns Lyng Group (JLG), TPG Telecom (TPG) and Megaport (MP1). Cash held at the end on month decreased to 4.5%.
Megaport’s 1Q23 result during the month saw the stock sell off on concerns around port consolidation and higher capital expenditure which raised concerned around the need for capital. After speaking to management and clarifying these issues we view the price weakness as opportunity to add to our exiting position, and the emerging companies lifecycle sleeve of the portfolio. We continue to see Megaport as having a highly strategic competitive position in the software defined networking space through its over 423 installed and 787 enabled data centres in 25 counties. With only limited exceptions we continue to see Megaport as having leadership in many areas in the early stage and growing segment it serves. The company is also highly leveraged to the USD with more than half of its revenues derived in US dollars.
During the month we exited our position in Ebos Group (EBO). Whilst the first quarter result was relatively strong demonstrating continued momentum in the underlying businesses we have growing concerns around the sustainability of the COVID-related pharmacy sales being maintained and risk around the renewal of the Chemist Warehouse contract.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-9.pdfSeptember, 2022
For the month the portfolio returned -5.46% outperforming the S&P/ASX300 Accumulation Index by +0.83%. BHP, Megaport and Northern Star were the best performers for the month as real yields rose. This weighed on long duration stocks and banking and REIT sectors as concerns of the impact of higher rates on valuations and bad debts came to the fore. As a result, Macquarie Bank, NextDC and National Australia Bank all weighed on performance. Resources and energy stocks tend to see less of a valuation derating on rising real yields. Earnings risk from lower commodity prices is the greater risk. Whilst commodity prices have retraced on growing recession fears, and in the case the oil price is now below levels when Russian first invaded Ukraine, they remain in the upper band of their historical range resulting in strong margins and cashflow generation. The record dividend paid by BHP in September is a reminder of that.
During the month we sold our residual position in Carbon Revolution (CBR). This has been disappointing investment. We remain attracted to the carbon wheel technology and global market opportunity, but we underestimated the challenges in scaling the business and capital required. This was clearly not helped by Covid and disruption to the automotive manufacturing market, but also technical challenges in the manufacturing process which have plagued the business getting to free cashflow, increasing the risk the business needs to be recapitalised and/or find a strategic investor.
In a relative sense we continue to see Australia as better positioned than most economies and markets given business conditions remain relatively robust and inflation has proven more constrained to date. But it is not immune to growing earnings risk. Rising inflation and rates will pinch on household cashflow and we expect this to eventually show up with a lag in lower activity and earnings downgrades. We remain cautious on consumer discretionary sectors and are favouring companies providing essential infrastructure type services (e.g. Chorus, TPG Telecom), essential services (Cleanaway, Qube), structural growth stories with a covid recovery angle and price power (CSL, IDP Education) and benefiting from rising rates. Cash held at the end on month increased to 7%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-8.pdfAugust, 2022
For the month the portfolio returned 0.31% underperforming the S&P/ASX300 Accumulation Index by -0.87%. Cooper Energy (COE) and Woodside Petroleum (WPL) were the best performers for the month, continuing to benefit from the favourable energy macro backdrop and improving stock specific fundamentals. After a disappointing couple of years, following the recent raising capital to acquire the Orbust processing plant from APA, we see multiple catalysts for Cooper Energy to continue to re-rate including commissioning of Orbust plant polishing unit in September, signing of term contracts and announcement of drilling campaign for OP3D.
Other stocks that contributed positively to performance were Treasury Wines Estates (TWE), Qube Holdings (QUB) and Seven Group Holdings (SVW). Treasury’s result highlighted the tremendous job management has done over the last two years in managing the China trade restrictions and Covid. We now see the business starting to get some ‘clearer air’ and able to benefit from the strategic plan its implemented to reposition the business which is expected to deliver further margin expansion and acceleration in earnings growth into FY23 and FY24. Qube’s result again highlighted its product and customer diversity and strategic and privileged nature of its assets, which are hard to replicate and have strong pricing power.
Despite the challenges of Covid, floods, supply chain restrictions and China lockdowns over the last 12 months the company delivered 25% underlying earnings growth in FY22 and expects strong growth into FY23 with minimal impact from inflation given its ability to recover costs. During the month we added IDP Education (IEL) to the portfolio. IDP is leading provider of international student placement and English testing services with a strong competitive advantage in large addressable end market. While international studies have faced a challenging time over the last few years, we believe a strong recovery is underway, and IDP has undertaken the opportunity to launch several new strategic initiatives (including the acquisition of India ELTS from British Council ) which has enhanced its competitive position.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-7.pdfJune, 2022
Recent outperformance in Australian equity markets reversed against developed market in June. The S&P/ASX300 Accumulation Index finished the month down 8.9%. This saw the FY22 year return -6.8%, the third such negative return in the past decade. In the month, consumer staples were the only sector that posted a positive return (+0.23%), albeit marginal. The market remained consumed by concerns of higher interest rates, driven by a 50bp hike by the RBA in early June. Compounding this, consumer and business confidence is dropping around the world as the reality of inflation and higher living costs bites. As a forecasting machine, the market is looking ahead to the next phase of the cycle and potential deterioration in company earnings.
With US equities now in a bear market, having corrected by more than 20%, bad news is becoming good news. That is, rising recession risk may still need to be priced into earrings, but it’s reflected in lower bond yields and valuations. Some predict the Fed may pause and even start to ease policy by the end of 2023, but for this to happen greater evidence that the structural drivers of inflation are abating is required. That said, the current reality is real yields are rising, which remain a headwind for equity markets and valuations. At the very least, it is safe to say that the neutral policy rate for central banks is now higher than it was pre-pandemic. The main reason is the shift in geopolitics and structural trade and energy and food prices, largely driven by the Russia-Ukraine conflict.
In the US, the Atlanta Fed model suggests a June GDP print of -2.1%, pointing to the US already being in technical recession (being two quarters of negative GDP growth). The strength of the labour market, which remains resilient despite the slowdown remains a key outlier. It is something we are watching closely as a barometer of whether a technical recession becomes something more serious. Central banks face the vexed issue, to what extent they are prepared to damage the real economy to snuff out inflation? Over the last six weeks we have seen a capitulation in central bank messaging: The Fed Put (implicit central bank support of equity markets) is now a Fed call.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-5.pdfMay, 2022
In May the ASX300 declined -by 2.76%, underperforming most global indices with the S&P500 broadly flat (-0.2%) and MSCI Global Equity Index (unhedged) -0.8%. Sector performance continued to favor the materials, financials, and energy sectors. Real estate (-8.9%) was the worst performing sector is driven by Goodman Group (-14.3%) after Amazon reported slowing e-commerce growth and suggested it was looking to sublease warehouse space. Softer sales reports from US retailers Target and Walmart and suggestion inflation is starting to eat into consumer purchasing also added to concerns around growth expectations and added to the debate around the potential for stagflation (higher inflation and rates and slowing economic growth), or worse recession.
In Australia, the decision by the Reserve Bank in May to kick off a new tightening cycle, with a 25bp hike in the cash rate to 35bps, was a contributing factor to the market's relative underperformance. This is the RBA’s first hike since 201o. On the back of this the futures market is now assuming the cash rate is nearly 3.5% in a year.
Acknowledgment by Central Banks that they are now behind the curve and need to move off emergency settings and tighten financial conditions is adding to concerns growth will slow. At the end of the day by tightening rates central banks are seeking to tighten financial conditions and take some heat out of the economy. Tighten too much and economic growth suffers and it raises the spectre of recession. Tighten not enough and inflation becomes entrenched. It is a delicate balance, and the challenge of trying to orchestrate a soft-landing.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-4.pdfFebruary, 2022
For the month the portfolio returned 1.35% underperforming the ASX300 Accumulation Index by -0.74%. The portfolio came through reporting season in good shape with no real result disappointments. In fact, it was one of the cleanest reporting seasons we can remember for a while in terms of results delivering relative to expectations. As a consequence, we have made few changes to the portfolio. As is often the case share price reactions didn’t necessarily reflect fundamentals, and at times seemed more a function of market positioning and the broader macro issues at play. This provided the opportunity to add to some existing positions where results reaffirmed our conviction.
The top contributors during the month were Woodside Petroleum, Northern Star and National Australia Bank. The more growth orientated names in the portfolio Uniti Group, Aristocrat Leisure and Seek were the main detractors. Both Uniti and Seek reported good results showing strong growth in their underlying businesses and excellent free cashflow generation. All three companies in our view have emerged in a stronger competitive position post Covid. Cash was 4.9% at month end.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-3.pdfOctober, 2021
Supply disruption and bottlenecks have been exacerbated by the Delta strain and lockdowns, broadening inflationary pressures out to food, energy and wages. Brent oil finished the month at US$84.38 per barrel, up a further 7.5% while natural gas in Europe continued to squeeze higher based on supply constraints and expectations of a cold winter ahead. How persistent and sticky these increases prove to be remains the question? Domestically, the Australian September quarter CPI number saw a meaningful increase, coming in at 2.1%. This is the first time the Reserve Bank of Australia (RBA) has met its 2 to 3% objective since late 2015, and it breaks the narrative that this target would not be met until 2023. The September quarter CPI print caused the bond market to challenge the RBA’s resolve to continue with its Yield Curve Control (YCC) policy and transitory inflation thesis, with the three-year Australian bond yield surging to 1.4% at the end of month. This resulted in the ASX300 selling off 1.4% on the last day of the month.
We continue to position the portfolio for the prospects of reopening, tapering and more persistent inflationary pressures, whilst seeking to live with the ongoing uncertainty of Covid through identifying companies experiencing positive tailwinds and which we believe will merge stronger. The top contributors during the month were Macquarie Bank, Uniti Group and Northern Star while Marley Spoon, Chorus and Carbon Revolution were the main detractors.
During the month Macquarie bank reported its first half 2022 result which came in slightly ahead of expectations driven by strong growth across all of its business and saw return on equity of 17.8%, close to double that of the Major domestic banks. The result was accompanied by a $1.5bn placement to fund ongoing opportunities. We continue to see Macquarie benefiting from structural industry tailwinds in infrastructure and renewable energy through its Green Investment Group and more broadly a favourable operating environment with strong levels of transaction activity, opportunities to realise investments and volatility in energy markets
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-2.pdfSeptember, 2021
The rally in equities continued last quarter with growth stocks again outperforming cyclicals. The S&P/ASX300 Accumulation Index returned 1.79% and is up 30.9% for the last 12 months.
The cycle is evolving and there are an increasing number of emerging risks bubbling to the surface including slowing growth, inflation, tapering, geopolitics, and China regulatory reform.
The course of the pandemic remains the central influence on financial markets and policy positioning. During the quarter the surge in the Delta strain saw renewed lockdowns and the economic disruption, raising concerns growth has peaked.
The Delta strain has exacerbated supply chain disruptions, triggering a surge in freight, labour and energy costs. This is challenging the transitionary inflation view and raising the spectre of stagflation (the ugly combination of rising prices on weaker growth).
The positive is the Delta outbreak has accelerated the vaccination rollout and NSW and Victoria (c.60% of Australia’s population) should be ready to fully reopen by mid-November.
In positioning for the prospects of reopening, tapering and more persistent inflationary pressures we have exited Reliance Worldwide, Carsales.com and RIO Tinto and added Corporate Travel and BHP.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1-1.pdfAugust, 2021
Equity markets continued to climb higher in August as investors looked through the impact of lockdowns from the Delta strain of the virus to the prospects of reopening on the back of higher vaccinations. The Australian equity market rose 2.6%, taking the year-to-date gain to 17% and the annual return to 28.6%.
The rise in delta cases and extent of the lockdowns in New South Wales and Victoria is expected to impact GDP growth by -2% to - 4% in the September quarter. But with the vaccination roll-out gathering pace there is an expectation once things open-up growth will bounce back in Q4/Q1. Around 62% of the eligible population has received one jab, with the 80% double dose target on schedule to be hit in November should current trends continue.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-2.pdfMay, 2021
Inflationary pressures and economic recovery remained the core narratives across markets in May with equity markets rising across the board. The Australian equity market rose 2.3% taking the year to date gain to 10.4%. Over 12 months, Australia is lagging hedged developed markets (+35.6%) but exceeding global markets in AUD term (+20.4%).
At the sector level in Australia Banks (+7.3%) were the best performer in May lead by CBA (+12%) and WBC (+5.8%) along with Consumer Discretionary (+3.5%) and Healthcare (+3.5%). Technology was the laggard (-9.8%), led by Afterpay (-21%) The broader Australian market continues to be supported by very accommodative fiscal and monetary policy settings and a strong recovery in earnings. Trailing earnings have risen more than 20% since September while consensus forward EPS growth is currently 15%. With a heavy weighting to banks and materials, two of the best performing sectors globally (up 72.9% and 55.9%, respectively), the Australian market has benefitted from the global rotation to value and cyclical stocks.
After such a strong recovery, given the low starting point, it is to be expected that growth momentum will start to slow at some point. This raises the question whether we have passed ‘peak’ growth this cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet-1.pdfDecember, 2020
The COVID recovery in markets continued in the December quarter with the ASX300 Accumulation Index up 13.8% and is now up near 50% from March lows. The US election result, positive vaccine news, and ongoing accommodative monetary and fiscal policy provided further impetus and investor confidence that economies can continue to recover, and the equity market cycle move from ‘hope’ to ‘growth’. At a sector and stock level this saw a sharp rotation in market leadership with more cyclical and value orientated sectors and stocks outperforming. Energy (+26.8%) and the banks (+26.0%) led the way whilst Technology (+22.7%) and Resources (+18.6%) also performed strongly.
The fund returned 10.57% for the quarter, underperforming the ASX300 Accumulation benchmark by 3.22%. For the 12 months to 31 December the fund has returned 5.64% outperforming the benchmark by 3.91%. The top contributors in the quarter were National Australia Bank, Woodside Petroleum and ANZ Bank, whilst The A2 Milk Company, Saracen Minerals and NextDC were the largest detractors. During the quarter, we added to our quality cyclical holdings including initiating a position in Qube Holdings and exited Amcor. We also lightened our gold position, but still see it as a hedge against rising government debt and rising inflationary expectations.
Our focus remains steadfastly focused on investing in quality companies with sustainable free cashflow growth at a margin of safety. The intent is to construct a high conviction portfolio with sector and lifecycle diversification. The COVID crisis has seen the sharpest and quickest economic contraction since the great depression, but also elicited the largest global coordinated policy response in history. The magnitude and speed with which this has happened is easy to gloss over, but unprecedented. In Australia lone in excess of $350bn has been provided in stimulus and relief to bolster household and business cashflow at a time when interest rates and bond yields have declined to historical lows. The result is household savings has risen, unemployment and business failures have been suppressed and economic activity and stock markets have roared back close to or above pre-COVID levels. All most unusual in a recession.
Equities have seen strong inflows with switching out of bonds in search of higher returns coupled with a surge in retail investor participation on FOMO (fear of missing out). Excess liquidity and investor confidence monetary and fiscal policy will remain accommodative has helped fuel this rally. Moreover, it is the expectation rates will remain low for a long time (or ever!) and belief that the ‘Policy Put’ - that central banks and government will intervene if the economy or markets splutter, is alive and well.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/SGH20-Fact-Sheet.pdfticker: ETL0042AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://sghiscock.com.au/fund/sgh20/
Monthly Fact Sheet
In the PDF file ==> Grab the Portfolio positioning and performance
asset_class: Domestic Equity
asset_category: Australia Large Growth
peer_benchmark: Domestic Equity - Large Growth Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
SGH20 invests in a concentrated portfolio of Australian stocks that aims to offer long term returns in excess of the measures over a rolling 5 year period. The fund will be managed according to the following guidelines: Investments in a portfolio of approximately 20 stocks that are listed, or due to be listed within the next 12 months, on the ASX or NZSE.