Summer Australian Equities

How did your portfolio perform?
The Summer Australian Equities Fund (the Fund) delivered a return after fees and before tax of 2.29% during August, marginally outperforming the Fund’s benchmark* return of 2.16%. For the 12 months to the end of August, the Fund delivered a return after fees and before tax of 7.70%, modestly underperforming the Fund’s benchmark return of 8.35%.
The main positive contributors in August were the Fund’s underweight positions in Commonwealth Bank of Australia (CBA) and Wesfarmers, and overweight positions in Light & Wonder (LNW) and Emeco Holdings.

CBA underperformed as its result highlighted sector issues around weaker home loan applications and pressure on bank earnings from softer credit growth. Wesfarmers reported a solid result, led by Bunnings, but weaker sales momentum at Kmart and higher capital expenditure and borrowing costs weighed on free cash flow expectations.

LNW’s second-quarter result benefited from stronger cost reductions and sales mix leading to stronger earnings on weaker-than-expected revenues. Emeco’s result was consistent with guidance, while its strong net cash position supported the announcement of a buyback of up to 10% of shares on issue.

The main detractors were underweight positions in gold miners Evolution Mining (EVN) and Genesis Minerals (GMD), and an overweight position in Flight Centre. EVN and GMD both benefited from the rally in the gold price with strong cash earnings while GMD is also advancing its acquisition of Vault Minerals. Flight Centre’s result was towards the bottom of guidance following an estimated A$60 million impact from the Middle East conflict. July trading reached a record level, but a softer outlook for the higher-value corporate division led to earnings downgrades.

We actively manage the Fund's foreign currency exposure associated with Australian equities. During the month, the NZ dollar fell -1.35% against the Australian dollar.

What happened in the markets you invest in? 
Resources outperformed during August as commodity prices strengthened, while healthcare continued to recover as reporting season results suggested an end to the sector’s earnings downgrade cycle. Financials, Consumer Discretionary and Real Estate underperformed as concerns increased around housing activity, household demand and the impact of higher interest rates.

Australian companies generally delivered better results than feared during reporting season, supported by cost control and margins rather than strong revenue growth. Resources accounted for much of the market’s earnings growth, while updates from domestically exposed companies pointed to softer underlying demand.

Unemployment increased to 4.5% in July, while headline inflation eased to 3.5% but remained above expectations. The Reserve Bank of Australia left the cash rate unchanged, leaving investors to balance the risk of further tightening against growing signs that economic activity is slowing.

What are we thinking about the future?
Reporting season reinforced the notion that household-facing activity is slowing as higher mortgage costs, weaker housing turnover and pressure on household budgets weigh on demand. By contrast, business lending and investment in infrastructure, defence, mining services and data centres remain relatively resilient.

We remain cautious on the domestic outlook. Household spending was resilient in July, rising 7% over the year, but softer employment, a weaker housing market and the possibility of further monetary tightening create a difficult backdrop for companies exposed to the domestic cycle. Credit losses remain low, but weaker employment and hiring could place further pressure on consumer spending and the banks. We therefore continue to favour less economically sensitive areas, including telecommunications and infrastructure-exposed companies.

*The benchmark for the fund is the S&P/ASX 200 Accumulation Index, 50% hedged to the NZ dollar.