Antares Prof Elite Opportunities (PPL0115AU) Report & Performance

Australian shares made strong gains on lower inflation and hopes that China will pursue more stimulatory policy settings. The energy sector led the market gains as oil prices surged. Financial shares also rebounded with optimism that the Reserve Bank interest rate hiking cycle was coming to an end. Information Technology continued to perform well, fuelled by the mania for AI related shares.

Resources shares gained on China stimulus hopes. But there was some weakness in the Consumer Staples and Health Care sectors given concerns that the Australian consumer is struggling.

The Antares Elite Opportunities Fund delivered a return of 2.9% (net of fees) for the month of July 2023.

Contributing to performance were overweight positions in Block Inc (SQ2) and Seek (SEK) and not owning Woolworths (WOW). Despite limited stock specific news, SQ2 shares rallied 21.4% as part of the risk-on trade and more positive Sector allocation sentiment on the resilience of the US consumer. SEK benefited from a shift in thinking about the macroeconomic environment. The market has previously been concerned about SEK’s volumes if the unemployment rate were to increase. While attending a parliamentary committee, WOW noted that shoppers had been moving to cheaper home brands on every day essentials as cost pressures rise. Our channel checks also indicate that discounting is increasing.

Detracting value were overweight positions in IGO Limited (IGO) and CSL and not holding a position in Woodside Energy (WDS). IGO provided a strong Q4 production and sales update. However, the company also gave FY24 production and capex guidance, of which the latter disappointed the market as it was significantly ahead of expectations. The 14.2% rise in the Brent Crude USD price during July was reflected in a buoyant performance by WDS shares. CSL’s share price has continued to languish since issuing disappointing FY24 guidance in June following news that margin recovery in its Behring plasma collection division would take longer than the market expected.

Australia’s economy is giving mixed signals with robust jobs growth and moderating inflation being countered by weak retail spending. There were strong employment gains in June as the unemployment rate edged down to 3.5% – essentially a 50-year low. Consumer price pressures also moderated in the June quarter with annual inflation coming in at 6.0%. However, the looming price rises for electricity and residential rents in the new financial year still suggest that inflation is a concern. For consumers, the squeeze on budgets from high inflation and rising interest rates has negatively impacted spending as evidenced by the sharp fall in June retail sales. While the Reserve Bank held the cash interest rate steady at 4.1% in July, it guided that further interest rate rises may be required to reduce inflation.

Australian shares made mild gains in June given signs that inflation pressures were abating and hopes that China will pursue more stimulatory policy settings. The Resources sector surged on China growth hopes with strong gains in iron ore prices. The Information Technology sector also made strong gains on the back of investors’ enthusiasm for anything remotely connected with AI. Financials rebounded, reversing May’s weakness with signs of resilience in the Australian economy mitigating credit risks. Healthcare was weak as investors became more cautious about the sector’s prospects.

The Antares Elite Opportunities Fund delivered a return of 1.1% (net of fees) for the month of June 2023.

Contributing to performance were overweight positions in Downer EDI (DOW), Immutep (IMM) and IGO Limited (IGO). Late in the month, DOW announced it had been awarded the contract to build and maintain Queensland’s new rollingstock project. This is expected to result in revenue of approximately $4.6bn for DOW. IMM announced it had been granted a US patent for IMP 761 which it describes as having the potential to address the root cause of many autoimmune diseases. The company also announced that following the successful placement of shares with institutional investors at the end of May which raised $67.9m, it had also completed a retail offer for a further $6.5m. Sentiment toward the clean energy sector has been boosted by M&A activity as well as rising prices for lithium carbonate. Also, during June, IGO announced the appointment of Ivan Vela as the new permanent CEO. He has a distinguished career in the mining and resource sector with experience spanning multiple commodities, diverse geographies and markets. Mr Vella has spent the last 20 years with Rio Tinto (RIO) most recently as chief executive aluminium and a member of the RIO executive committee.

Detracting value were overweight positions in CSL and Northern Star (NST) together with not owning Fortescue Metals (FMG). CSL provided a trading update indicating currency headwinds would impact its FY23 result. More significantly it noted margin recovery in its Behring plasma collection division would take longer than the market expected, as both donor fees and labour cost inflation remain higher than anticipated. This meant that CSL’s FY24 guidance was below consensus and the stock was sold down. NST announced a $1.5bn expansion of its KCGM Mill during the month which it stated would be funded from cash and forecast cashflow and would double its processing capacity. However, NST shares finished lower for the month as did the gold price. Optimism that further stimulus would drive Chinese growth saw the iron ore price spike and so too FMG’s share price.

Australia’s economy has displayed more positive signs with strong jobs growth, a rebound in retail spending and inflation moderating. May saw Australia’s employment expand by a robust +75,900 jobs and the unemployment rate edge down from 3.7% to 3.6%. Consumers were also more willing to raise their retail spending in May but this also reflected promotional activity and sales events according to the Australian Bureau of Statistics. Consumer price pressures moderated in May with annual inflation coming in at 5.6% compared to 6.8% for April. However, the looming strong rises in electricity costs and residential rents in the new financial year suggest a painful squeeze on consumer budgets. The Reserve Bank again surprised with another 0.25% interest rate hike in June taking the cash interest rate to 4.1% in the hope of returning inflation back to its 2% to 3% target range.

Australian shares fell in May as lower commodity prices, higher interest rates and weak consumer spending cautioned investors. The sharpest falls were in the consumer discretionary and staples sectors given signs of a retail recession for consumer spending. The combination of higher mortgage interest rates, rising rents and stubborn inflation pressures is squeezing purchasing power. There was also notable weakness in the resource sector given lower coal and iron ore prices on China concerns. Financials also disappointed given the prospect of lower profit margins with higher deposit interest rates and more sedate credit demand. Echoing the US market and the surge of investment interest in anything remotely related to artificial intelligence (AI), the Australian Information Technology sector posted a double-digit gain for May.

The Antares Elite Opportunities Fund delivered a return of -1.9% (net of fees) for the month of May 2023.

Contributing to performance were overweight positions in James Hardie Industries (JHX) and Santos (STO) together with not owning NAB. JHX’s share price improvement post results reflects better than expected earnings margins and 1Q24 earnings guidance. It also appears that the US housing market has bottomed leading to improved investor sentiment towards housing related stocks. The onset of cold weather and strong spot gas prices has boosted sentiment for gas producers. Several of STO’s plants that experienced outages early this year, including Moomba and Varanus island, have recovered, removing concerns about production. Supply disruptions for competitor Beach Energy may have been another positive for STO sentiment. NAB shares were under pressure after the bank released its first half results for 2023. Despite some positives, including a lift in dividend, the market reacted to comments from the bank on the impact of lower house prices and volume growth amid increased competition. This was reflected in a $393m credit impairment charge.

Detracting value were overweight positions in IDP Education (IEL) and South 32 (S32) together with not owning Woodside Energy (WDS). IEL shares were sold off sharply on news that the Canadian government was opening the English testing in the Student Direct Stream market to other providers. With prices for major commodities and metals falling in May on concerns about Chinese demand, it was not surprising to see S32’s share price also finish the month down, particularly after flagging higher costs in its most recent quarterly report. The strong spot gas price and positive sentiment for gas producers combined with reports that LNG cargo liftings from the North West Shelf and Wheatstone are tracking ahead of consensus forecasts for 2Q23 were positives for WDS.

Australian Shares made solid gains in April given the global share rebound and signals from the Reserve Bank for a pause in raising interest rates. The strongest gains were from the AREITs which benefitted from the lower rates and the Information Technology sector which followed its global peers higher. The Resources sector was dragged down by the Materials stocks as iron ore prices corrected on weak steel demand, but this was partly mitigated by gains in Energy and Gold stocks.

The Antares Elite Opportunities Fund delivered a return of 1.8% (net of fees) for the month of April 2023. Contributing to performance was an overweight position in Northern Star (NST) together with decisions not to own Rio Tinto (RIO) or Fortescue Metals (FMG). NST shares continued to rally together with the gold price as investors again sought refuge in the precious metal following the US banking crisis. Despite some positive economic signals from China, steel demand was weak which saw iron ore and metals prices drop in April – as did both RIO and FMG shares.

Detracting value were overweight positions in BHP, Block (SQ2) and South32 (S32). BHP shares also declined on lower iron ore and metals prices. SQ2 shares fell on the release of research from a short seller which alleged that many of the cash app accounts on the SQ2 platform were fraudulent or used for nefarious purposes. Having read the report and following additional disclosure from SQ2, as well as a number of discussions with US based analysts and benchmarking of payment issues as disclosed by major US banks such as Bank of America, we do not agree with the short seller’s research. S32 released its quarterly production report during the month revealing that wet weather across many of its operations had adversely impacted production and costs had increased. Although the company noted it achieved higher prices across most commodities and retained much of its full-year guidance the stock was sold down.

Australia’s economy still appears to be softening. Despite the pause in rate rises in April, consumers have reasons to be cautious given still high inflation and the impact of higher interest rates, particularly for those coming off fixed rate mortgages onto variable rate mortgages. Although below previous quarterly increases, first quarter 2023 CPI rose by 1.4%, taking annual inflation to 7.0%. The job market remains resilient and the unemployment rate is still historically low, but caution prevails over confidence in regard to our outlook for 2023.

Australian shares slipped into negative territory in March. The sharpest falls were in the real estate and financial sectors given the turmoil in the global banking system and lower bond yields. However, strength in the resource sector on hopes of a Chinese economic recovery helped limit the downside in Australian share markets. There were also gains for communications, consumer discretionary and consumer staples sectors on hopes that the Reserve Bank would pause on further interest rate increases.

The Antares Elite Opportunities Fund delivered a return of 0.2% (net of fees) for the month of March 2023.

Contributing to outperformance was an overweight position in Northern Star (NST) together with decisions not to own NAB and Macquarie Group (MQG). Northern Star (NST) shares rallied during the month as the US banking crisis saw gold prices increase by 8%. The company provided an update on its Pogo Operation Sector allocation in Alaska where gold production was halted in order to repair damage to the ball mill motor that was discovered during routine repairs. While the disruption is expected to impact production by 20-40k oz in FY23, the company’s production guidance remains unchanged. The global banking turmoil impacted the sector in Australia and NAB and MQG shares were not exempt.

Detracting value were overweight positions in APM Human Services (APM) and Goodman Group (GMG) together with the decision not to own Newcrest Mining (NCM). Despite announcing several new north American contracts during the month, APM shares have continued to languish. There was no company news from GMG during the month, although sentiment towards the real estate sector was generally negative. NCM shares were beneficiaries of the higher gold price and were underpinned by the scrip takeover offer of former owner and gold producer, Newmont.

Australian shares made strong gains in January. Most notable were the consumer discretionary and real estate sectors on hopes that the cycle of rising interest rates was nearing an end. The resource sector continued its recent strong performance given rising iron ore and metal prices on China recovery hopes. Consumer staples, information technology and financial sector shares also performed well. The only negative sector was Utilities but this comes after robust gains in recent months.

The Antares Elite Opportunities Fund delivered a return of 6.9% (net of fees) for the month of January 2023.

Contributing to outperformance were overweight positions in Northern Star (NST), Goodman Group (GMG) and South32 (S32). The (USD) gold price rose by nearly 6% in January, building on its recent strength on the expectation of a slowdown Sector allocation on the pace and size of rate hikes. NST shares were beneficiaries. The property sector was one of the best performers in January as the interest rate outlook moderated. GMG shares were keenly sought, also benefitting from their positioning as a growth stock hence a beneficiary of the compression in the long bond yield. S32 shares were stronger on a good quarterly report as well as being buoyed by increases in the prices of its key commodities including aluminium, copper and zinc.

Detracting value were overweight positions in Santos (STO) and Incitec Pivot (IPL) and not owning Macquarie Group (MQG). STO shares were weaker on a dip in the oil price and news that its Narrabri project may be delayed by an appeal from the Gomeroi people in relation to native title consent for drilling. There was no corporate news from IPL in January. However softer ammonia prices following a warmer than expected winter in Europe saw less gas demand and lower prices which had a flow-on effect to nitrogen pricing (including for ammonia) that may have contributed to IPL’s share price weakness. There was no particular news from MQG during the month. Given its leverage to markets, MQG is often viewed as a market proxy hence its shares bounced back strongly as did global indices in January.