Australian market review
Written and accurate as at: Jun 21, 2017 Current Stats & Facts
We remain in a bifurcated market with significant divergence between the bond-sensitives (S&P/ASX 200 A-REITs +4.3%) and the more cyclical resources (S&P/ASX 300 Metals & Mining -2.7%) beneath the headline +1.7% gain of the S&P/ASX 300. The US Fed raised their benchmark rate last week, as widely expected, however it was against a backdrop of softer economic data. This is fuelling speculation that the Reserve is ahead of the curve and that therefore the peak in rates may not lie too far off; bonds and bond-sensitive stocks remain well-bid as a result. Meanwhile, softer commodity prices – and surprisingly strong oil production – continues to weigh on resources.
Lithium miner Galaxy Resources (GXY) (-19.2%) was the worst performer in the ASX 300 for the week. Copper miner Sandfire Resources (SFR) (-6.2%) also underperformed, as did Oz Minerals (OZL) (-5.9%), Alumina (AWC) (-5.3%), Fortescue Metals (FMG) (-3.3%), and Iluka (ILU) (-3.2%). The large diversifieds also came off; Rio Tinto (RIO) was off -4.5% and BHP Billiton (BHP) -2.3%. Gas plays Origin Energy (ORG) and Santos (STO) were down -2.0% and -2.9% respectively, while Woodside Petroleum (WPL) (+0.7%) underperformed the market while managing to hold its head above water.
The retailers managed a bounce following the volatility of previous weeks, with JB Hi-FI (JBH) up +6.6%, Myer (MYR) +6.4%, and Harvey Norman (HVN) +7.7%. Retail-linked A-REITs such as Vicinity (VCX) (+6.6%) and Scentre Group (SCG) (+4.6%) also did well. This is likely to be a brief respite, however, given the surprise announcement that Amazon has agreement to buy US grocery retailer Whole Foods Market. There are two observations to make here; the first is that it demonstrates that Amazon has failed to crack the food segment with its technology platform. The key difference from other product areas is that people generally are less likely to buy food online – given a behavioural inclination to inspect and select fresh food, in particular – and this demonstrates that even Amazon believes that physical premises will never be entirely redundant. However the A$18bn they have splashed on this deal also suggests that they are determined to compete in food, which accounts for 50% of all retail spend in the US, placing pressure on the incumbents. The decision by Whole Foods Market’s board to approve the sale – which remains subject to shareholder approval – at a price well below where it sat this time roughly two years ago could be seen as tacit acquiescence that the industry is about to get a lot tougher.
Interestingly supermarkets in the UK, having been through the competitive disruption and margin re-basement driven by the incursion of the German discounters Aldi and Lidl, are now doing reasonably well. The US is at a different phase in its supermarket cycle and, with Aldi and Lidl more active there and now Amazon’s entry, it remains to be seen how it plays out. Australia, too, is at a different point; yet nevertheless this news could very well translate to further pressure on Australian retail stocks despite the reality that it is likely to take some time for Amazon to get its business model right with Whole Foods before it even thinks about applying it overseas. We believe that the spectre of Amazon could help drive attractive investment opportunities in specific Australian retail stocks over the next 12-18 months. As always, heightened uncertainty leads to greater mispricing and greater opportunities for active managers.
Elsewhere, health care stocks were generally stronger, led by Sirtex Medical (SRX) which gained +10.3% in something of a dead-cat bounce. Mayne Pharma (MYX) (+10.1%), Ansell (ANN) (+7.8%), CSL (CSL) (+2.9%) and Resmed (RMD) (+3.1%) also outperformed.
Nine Entertainment (NEC) gained +5.7% as its competitor, Ten Network (TEN) went into voluntary administration. TEN is likely to remain in business, although the strategy remains to be seen – will it remain as an aggressive bidder for content, or does it become a “Fox-lite” offering? Its troubles offer a window of opportunity for NEC, as any doubt around TEN’s ability to honour multi-year contracts for rights could see reduced bidding tension on content – for cricket’s popular Big Bash, in particular. Nevertheless, the local media industry remains under pressure, as both Apple and Facebook have recently been hiring specialised TV executives, signalling their intent to compete in long-format programming, which attracts the bulk of advertising dollars. Proposed changes to Australia media reach rules could help drive consolidation and efficiencies in the local industry, however this has been complicated by the developments at TEN, with politicians possibly wary of being seen to change the regulations to help the wealthy shareholders currently propping up the company.