- For the month the Small Ordinaries fell by -0.5% outperforming the ASX 100 Leaders which fell by -3.1%. Small Industrials rose by +1.0% and Small Resources fell by -10.0%. Global equity markets were volatile but generally weakened on softening Chinese data and the game of second guessing the US Federal Reserve on interest rates.
- The $A/$US eased -1.3% in the month to be down -20% over the last 12 months. Besides improving Australiaís competitiveness it also means that Australian assets are less expensive to foreign buyers. This has spurred corporate activity. The portfolio has accepted the Jangho (China) takeover offer for Vision Eye Institute. Other takeovers over the last month include the Equifax (US) bid for Veda (not held). We expect further corporate activity. The lower $A also improves the value of offshore earnings and large offshore earning companies Macquarie Atlas Roads and Nufarm were both strong performers in the month.
- Earnings growth was scarce in FY15 and remains so in the current competitive environment. The transition of the economy from mining boom to industrial growth is bumpy. Home building has been a source of growth but the momentum of that growth appears to be easing with residential building approvals weaker than expected in August -6.9% mom (+5.1% yoy). Also of concern has been the retail sales data for August which rose by only +0.4%mom (+4.5% yoy) after contracting by -0.1% in
July. This presents a difficult policy dilemma for new Prime Minister Turnbull and the Reserve Bank. Turnbull has emphasised taxation reform which with initiatives such as the recently concluded Trans- Pacific Partnership should benefit business.
- Following a strong profit result, Nufarmís share price rose +14% in September, making it one of the portfolioís largest positive attributions. Nufarm reported a +35% increase in underlying EBIT on a +4% increase in revenue for the year ended July. Nufarm is a global agrichem company with only 20% of group earnings from Australia/NZ. The company has embarked upon a major restructure which is expected to increase ROFE from the 9% earned in 2014 to 16% by 2018. The programme will cut costs, reduce working capital and rationalise plant. This plan, with organic revenue growth, will drive solid profit growth over the medium term.
- The portfolio outperformed the benchmark in September. On the negative side financier Thorn Group, travel insurer Cover-More and litigation funder IMF underperformed. On the positive side being underweight resources aided relative performance. Also generating positive performance were Macquarie Atlas Roads, Smart Group, and Nufarm.
- Macro factors are likely to dominate short term market activity and are likely to cause volatility. We expect the US to raise interest rates but the profile of any move(s) will be cautious and shallow. The outlook for the Chinese economy is opaque and a cause for more concern.
- Market valuations are improved following the market correction in June/August. This remains the case notwithstanding the optimistic earnings expectations which will be downgraded through FY16. The downgrade cycle is likely to commence with the forthcoming annual meeting season.
- Equity supply from IPOs, escrow stock release and capital raisings (e.g. banks) has satiated much demand. Issuance is now expected to wane given market conditions. Volatility is likely.
- We expect stocks with sound valuations, solid balance sheets and recurrent earnings to outperform.