Summer Australian Equities

The Australian equity market surged in March with positive signals across key indicators for the US and Australian economies. Ongoing employment growth, along with recovering retail spending and a surprisingly strong print for the performance of manufacturing index (PMI) in the US, suggests momentum remains.   

Very strong equity markets now appear to be anticipating a ‘no landing’ outcome for the US and Australian economies. This scenario sees employment gains of recent years being preserved, income shocks for households will largely be avoided and scope for lower interest rates (compared to ‘higher for longer’ interest rates) as inflation continues to decline. These factors are generally positive for corporate earnings and equity valuations.  

The best performing sectors for the month were Real Estate (9.70%) and Energy (5.33%). The former surged on lower bond yields and particularly impressive gains from real estate fund managers, Goodman Group and Charter Hall. Escalating geopolitical conflicts and fading recession fears also saw oil prices surge during the month, boosting Energy stocks.  

The worst performing sectors for the month were Consumer Discretionary (0.92%) and Communications Services (-0.57%). Weakness in Consumer Discretionary looked like payback after a solid run through reporting season. Communication Services was the only sector to post a negative return this month, dragged lower by the ‘classified’ businesses, including Seek, REA and Carsales where listings have been mixed.

Summer Australian Equities delivered a return net of fees and before tax of 4.70% during March. For the 12 months to the end of March the fund delivered a return net of fees and before tax of 17.19%.

Positive contributors to performance were our overweight position in oil producers Santos and Karoon Energy. Oil supply concerns have deepened in recent months with escalating tensions in the Middle East and Ukraine military strikes against Russian Oil refineries.

Key negative contributors to performance were our underweight positions in gold miner, Newmont and industrial real estate fund manager, Goodman Group. Newmont benefitted from a positive backdrop for gold prices which hit a record high in the month. Improving demand for real estate assets has boosted the outlook for fee generation at Goodman Group, while the pivot toward data centre development has piqued interest in Goodman as an alternative way to play the current boom in AI.

We actively manage the fund’s foreign currency exposures. As at 31 March 2024, these exposures represented 97.29% of the value of the fund. After allowing for foreign currency hedges in place, 64.01% of the value of the fund was unhedged and exposed to foreign currency risk. 

With the recent surge in oil stocks, we have lightened some of the fund's exposure in this space but remain overweight. We see a longer term story playing out where access to capital (and it’s cost), environmental or political concerns and limited appetite to invest amongst corporates all contribute to falling investment (and supply growth) in the sector, while demand falls only slowly, supporting returns from the sector.

Ongoing weakness in iron ore and coal prices have provided us the opportunity to add to our holdings across the major miners during the month at quite attractive levels.

The Australian economy remains resilient. We’ve seen continued employment growth, rising house prices and fewer signs of credit stress in the system, while upcoming mid-year tax cuts are also likely to support growth. A relatively strong economy, higher oil prices and still rising wages suggest little reason for much monetary easing to occur this year. Looking further ahead there is a clearer trend downward in the CPI which should see longer term rates continue to decline, supporting equity valuations.