Weekly market update
Written and accurate as at: Jul 03, 2018 Current Stats & Facts
The local market rose into the end of the financial year, gaining +0.34% for the week and +2.62% for the month. It posted a +8.69% gain for the full year. Earnings growth has powered these gains, as the Royal Commission and a challenging environment has seen the banks de-rate, keeping the market’s aggregate valuation rating steady. This is important, as ultimately we see earnings-driven market growth as more sustainable than valuation-driven returns. The market’s return was broadly in-line with the +11.11% 12-month gain from the MSCI World. In the US, the S&P 500 gained +12.34% and the NASDAQ +22.23%, while Japan’s Nikkei was up +10.31%. European returns were muted, with the UK’s FTSE up +3.90% over 12 months, and Germany’s DAX down -0.89%.
Resources led the market up over the week, gaining +2.46% to cap their +39.01% return for the year. Listed property shed -1.43% and only managed to eke out a +3.05% gain over 12 months, given rising US interest rates and the stiff headwinds facing the retail sector. Financials ex-AREITs were up +1.14% for the week and finished down -2.6% for the year. The stock dispersion we are seeing across the market is particularly evident here, with very different returns within insurance – IAG (IAG, +30.03%), QBE (QBE, -16.18%) and diversified financials (Macquarie Group (MQG, +39.37%), AMP (AMP, -31.14%). Commonwealth Bank (CBA, -10.64%) fared worst among the majors, followed by National Australia Bank (NAB, -6.00%) and Westpac (WBC, -2.59%), while ANZ (ANZ) actually managed to post a 1.73% gain. UK banking group CYBG (CYB), the spin-out from NAB, was up +23.19% for the year. Finally, the Small Ordinaries fell -0.83% over the week, but ended with a +21.02% gain for the financial year, its outperformance helped by strong gains in small resource companies.
Metcash’s (MTS, -6.45%) full year result provided the only major piece of relevant stock-specific news for the portfolio last week. The result was reasonable, in our view, given the competitive challenges in the supermarket sector. Food and grocery sales declined -3.2%, however this is an improvement on the previous period. The liquor and hardware divisions were broadly in-line with expectations at the EBIT level. Management continue to focus on cost reductions to offset the challenging revenue environment, increasing their target of total cost savings by $5m to $125m, having delivered $95m thus far. They also increased expected synergies from the integration of Home Timber and Hardware to $34m, up from $24m previously. The 7 cent dividend was largely as expected, however management also announced an off-market buyback of at least $125m, which accounts for ~5% of their market cap and will be earnings accretive.