In February the Australian consumer, buoyed by the resurgent property market, has held up well and companies servicing this segment were among the better performers, with construction materials, media and leisure companies performing well, SSgA head of active quantitative equities, APAC, Olivia Engel said.
“However, with average forward P/E ratios for these industries between 20X and 25X investors need to be aware there is little margin of safety if they fail to deliver on their earnings,” Ms Engel said.
Over the month of February the S&P/ASX 300 Index was up by 4.9 per cent.
“However, the picture becomes a little cloudier when peering more carefully into the results,” Ms Engel said.
“For a start, a significant proportion of the earnings and margin increases companies reported were driven by cost-cutting rather than top-line growth,” she said.
“This reduction in expenditure has helped the large capitalisation stocks particularly in the resources sector report bumper earnings, but will have negative consequences for other parts of the economy.”
The industry returns over the course of the month reveal the trickle-down effect of cost-cutting with mining services, capital goods and commercial services at the bottom of the performance table, Ms Engel said, adding that this does not impact SSgA’s investment strategy.
“We still build a portfolio with quality stocks at reasonable valuations that should provide strength through the cycle returns,” she said.
“The SSgA Australian Managed Volatility Alpha Strategy prefers quality companies with growth potential, strong cash flows, sustainable dividends at attractive valuations. The benchmark index does not drive our portfolio construction.”
The strategy returned 4.2 per cent (before fees) in February with strong stocks within healthcare, utilities and AREITs.
Companies that were ranked well within our stock selection model such as G8 Education (+27.7 per cent), Domino’s Pizza (+27.1 per cent), Ramsay Health Care (+10.0 per cent) and Tassal Group (+10.6 per cent) contributed strongly.
These were offset by the strategy’s lower representation in banks and resources, which had outperformed the market during the month.
The strategy outperformed the market cap index by 0.67 per cent this calendar year to date.
