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Weekly market update - 3rd of September 2018

Written and accurate as at: Sep 04, 2018 Current Stats & Facts

The Australian broader index finished the month of August with a gain of 0.6% with a late month rally over the last week (+1.1%) bringing it back into positive territory. The S&P/ASX 300 Accumulation index (including dividends) returned 1.3%/1.4% over the week/month respectively. Resources (+0.6%) were up over the week, despite slightly weakening commodity prices across the board, except for oil. Financials (+2.0%) also recorded some gains as the outlook for the banking industry brightened somewhat following Westpac’s out-off-cycle mortgage rate hike: it lifted both the majors (ANZ,+3.5%; NAB, +2.8%; CBA, +0.5%), as well as the regionals (BEN, +4.4%; BOQ +4.6%). Coming out of the reporting season, we have witnessed a market that has been driven by investor preference extremes: on the one hand, a number of the heavily shorted stocks attracted some reasonable covering after reporting okay results, lifting their share price swiftly. On the other hand, some of the widely favoured growth darlings that were already trading at record highs also continued to benefit from the lingering momentum.

In terms of stock specific news and performance, TPG (TPM, +11.8%) was one of highlights of the week and the month (+50.0%), as the telecom company announced a proposed merger with key competitor Vodafone Hutchison Australia (VHA).  The heightened competition within the mobile segment lately, induced by the likes of TPG with a business model that is less than sustainable has seen the whole sector de-rate. TPG itself has suffered an approx 50% decline in its share price over the past two years. With this announced merger, the industry dynamic may improve from here and could benefit other key players in this market, including Telstra (TLS, -2.4%). That said, a certain degree of overreaction to the positive news in TPG’s share price could be assumed considering TPG is now trading at approx 2x the multiple that the nation’s biggest telecom company TLS is trading at.

Elsewhere, Boral (BLD, +7.9%) had a relief-rally on the back of a set of in-line results. A2 Milk (A2M, +6.6%) also continued to rise over the week, finishing August almost 20% higher. Some remain wary of the high expectation baked into A2M based on the company’s China growth strategy, as felt by some that the daigou channel starts to max out. Finally, as mentioned above, a raft of growth stocks also continued to perform last week, including REA Group (REA, +3.9%), Treasury Wine Estate (TWE, +3.9%), Resmed (RMD, +3.7%) and Carsales (CAR, +3.7%).

On the less positive side, Caltex (CTX, -8.6%) sold off following its trading update. The results came in at the bottom end of guidance due to lower refining margins, which are always difficult to predict. The rest of the result was broadly in line. What has dampened investor sentiment instead was the strategic review of the company’s asset base: the market was expecting some capital release from either structuring up CTX’s petrol stations into some form of a REIT, or asset sales from its infrastructure businesses. Management however concluded that there would be limited value creation to the business from both strategies, and instead pursued a sale and leaseback of up to a quarter of its $2 billion in petrol station real estate via a long-term partnership. There would be limited capital release from this announced strategy. This disappointed those who had seen CTX as a capital-return stock, rather than a long-dated reinvestment story. Also within the Energy sector, Origin Energy (-3.5%) remained under pressure due to the policy uncertainty from the government; even though the same issue did not impact key rival AGL (AGL, +1.1%) as much. Metcash (MET -3.2%) also retreated, despite providing the market with a positive AGM update as it seals its South Australia wholesale supplies contract. Lastly, private hospital operator Ramsay Heath Care (RHC-2.3%) finished the week lower after reporting a set of in line results. The outlook for FY19 however was lacklustre due to the industrial headwinds in Australia and France. Management is positive with FY20 when these geographic issues subside. In this same vein, we have seen lately that the market loses tolerance in companies that do not have fundamental issues, but at the same time also lack immediate earnings accretions.

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