Weak market returns during reporting season
The weak market returned in August, which marked the beginning of the reporting season, however the fundamentals on the whole have not changed, suggesting this may be a temporary reversal, according to State Street Global Advisors (SSGA).
The company's head of active quantitative equity, APAC, Olivia Engel, stressed that a lacklustre company reporting season hid a surprising risk-on month.
Although at a company level there were slightly more positive surprises than negative in terms of reported earnings, the reported sales which were more negatively skewed suggested that earnings beat were not coming from underlying growth but more likely through the companies attempting to reduce costs.
SSGA also said it expected hard times for those searching for genuine sales growth as the companies' cost-cutting policies may help the earnings but they would not support "top-line economic growth" and more corporate investments would be necessary.
As far as the sectors were concerned, August saw the risk-on theme evident in sector returns, with IT, energy, and selected metals and mining shares leading the way while gold stocks, utilities and telecoms along with selected media companies were perceived as relative safe-havens.
According to SSGA, returns in August also showed a reversal of fortune from previous months with winners becoming losers and losers winners, with sectors that had contributed significantly to the benchmark return in 2016, such as gold, real estate, utilities and industrials, giving back some of the gains in August.
The State Street Australian Equity Fund also followed this trend in August, when it underperformed the market by more than 3.3 per cent net and put August among its worst five months in terms of both relative and absolute performance since the fund's launch.
"Often we see increased volatility during reporting season as companies rebase expectations and share prices react to reflect the innovations in the fundamentals," Engel said.
"Despite this volatility, a beat, or miss, or sharp price reaction in August does not necessarily signify a change in the long-term fundamentals for a company. Nor should short-term performance alone change our investment approach."
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