Armytage Strategic Opportunities WS (ETL0139AU) Report & Performance

Majority of sectors finished the month lower with the consumer facing sectors performing the worst. Treasury Wine (TWE) lowered its earnings guidance amid an ongoing inflationary environment, particularly for packaging materials, & softening consumer demand. Similarly, other companies such as Wesfarmers (WES) and Endeavour Group (WV) also noted weakened consumer appetite in recent months. A few retailers such as Dusk (DSK) & Universal Store (UNI) also downgraded their trading expectations, signaling that even the more resilient segments such as youth retailing was not immune to this consumption downgrade cycle.

The Material sector underperformed as a weak set of Chinese industrial data further confirmed that China’s post lockdown economic recovery is losing steam. We need to see proactive easing from the Chinese policy makers to keep the momentum going. Commodity prices retreated as a result. Iron ore -756%, Copper -S.91%, Aluminum -3.4%, although Lithium was an exception, +67.6%. The share prices of resource stocks reflected the commodity movements, with EV/lithium stocks such as PLS, AKE and IGO outperformed the base metal peers (BHP, RIO, FMG). Additionally, during the month, ME has agreed to merger with Livent Corp (US) to form a US$10b lithium powerhouse, making it the 2nd lithium M&A of 2023, and further reiterate the investment thematic of lithium and Electric Vehicles.

In terms of stocks, NextDC (NXT) had a great month, +12.7596, on the back of the Al phenomenon. NXT remains our top Tech pick to benefit from the Al Boom due to a more affordable valuation & possession of real assets (land and properties). Some other top performers of the fund include James Hardie (MX), +9.61%, as signs of recovery of the US housing market emerged. Cleanaway (CWY) advanced 7.4% as the company reaffirmed guidance.

In April. the Australian equity market experienced a relief rally as the banking crisis appeared to be contained. The financial sector led the market, with players that were more leveraged or exposed to business lending driving the gains. The RBA’s decision to maintain the overnight cash rate at 3.6% also contributed to positive sentiment in the market.

The headline Consumer Price Index (CPU declined to 7% year-on-year (YoY) by the end of the March quarter, down from 7.8% YoY in the December quarter although several categories such as Rent. Utility bills and Food still experienced high inflation. This confirmed the RBA’s assessment that inflation has reached its peak. However, the unemployment rate remained unchanged at 3.5% for another month, indicating a persistently tight labour market. There is a cautious outlook regarding future CPI releases and interest rate decisions, as there is a possibility of unexpected upward surprises.

Defensive and non-cyclical sectors outperformed as market positioned itself for an economic downturn. Endeavour Group (EDV) advanced 5% as Its 1H23 result beat consensus forecast by 7%. specifically in the hotels & drinks (Dan Murphy’s) segments. Moreover. trading during the first 5 weeks of CY2023 was also positive with hotels +31% vs pcp. Recession proof stocks such as The Lottery Corp (TLC) and the 2 supermarkets (COL and WOW) also outperformed market. Shares in Telstra (TLS) firmed 1.96% as the Telco reaffirmed guidance and commitment for its FY25 $500m cost reduction target. Shares in Aussie Broadband (ABB) also performed well as the teko reported strong growth across all key metrics. Other performance contributors to the fund include gym operator Viva Leisure (WA). +19.4%, who posted a profit for the first time since the pandemic lockdown disruption.

On the other end of the spectrum, Materials was the worst performing sector in February. crashing close to 7% on recession fears. BHP and RIO declined 8.45% and 7.83% respectively despite strengthened iron ore prices. Shares in lithium miners Pilbara (PLS) and Al!kern (AKE) each declined 12% as lithium spot prices continued to drift from the peak. Market also speculated more downside to lithium prices this year due to expanding supply, slowing Chinese demand and the Chinese government’s potentially imposing restrictions on mining projects amid environmental concerns.

Shares in the banks were weakened after CBA revealed that Australia 01 Bank’s Net Interest Margin (NIM) has peaked in October 2022. The bank also indicated that home loan pricing across the industry is currently below cost of capital as lenders battled it out for market share. According to CBA. Australian homeowners to date have only felt about half of the impact from the current RBA tightening cycle. indicating more pain to come.

The fund edged down 4.42% in December on the back of a weaker stock market The 1st Half of Financial Year 2023 came in at 2 cents per unit, payable the 10th business day of January 2023.

The Materials sector stood out. supported by strong commodity prices (iron ore +14%. nickel +11%). BHP’s takeover of OZ Minerals (OIL) became effective in December after 5 weeks of due diligence. OD_ shareholders could receive a fully franked final dividend of up to 51.75. which is the equivalent to an approx. 6% yield. Other iron ore stocks such as RIO and FMG also performed well, whereas lithium producers PIS and AKE underperformed. We took the opportunity to top up our positions in both companies on price pullbacks.

Consumer staples, Telecommunication and Utilities all fared better than market, thanks to their defensive nature. Woolworths (WOW) has sold 5.5% of the issued shares in Endeavour Group (EDV) to fund its PET Inspiration (PETstock) acquisition. Post-sate, WOW will retain 9.1% interest in WV with no intention of further selling in the immediate to medium term. The 2 supermarkets. WOW and COL. have consistently underperformed market in the past 6 months. We believe the dynamic for these stocks will soon change as the demand for recession proof stocks returned. Treasury Wine (TWE) performed well as the China/Australia relation improved. Shares in Telstra MS) firmed despite the ACCC opposing its regional tower sharing agreement with TPG. Aussie Broadband (ABB) also outperformed market.

On the stock front, Bendigo Bank (BEN) came out from left field with a prof it upgrade and a better than expected exit NIM of 2.01%. We subsequently saw a rebound in share prices of the big 4 banks. and to a lesser extent. Macquarie (MAGI. Unfortunately for Star Casino (SGR) shareholders. the NSW’s newly proposed casino tax regime sent the stock into panic mode, which saw Star’s share price down nearly 35%. Nevertheless, we suspect this will attract a lot of attention from overseas Private Equity firms who would like to have an exposure in the Australian duopolistic casino industry.

The fund returned 5.17% for the month of November.

The Materials sector rallied over 15% in November as commodity prices soared on China’s reopening, specifically iron ore, and nickel. The fund held an overweight position in BHP and a market weight position in RIO. Shares in BHP and RIO advanced 21.84% and 24.29% in November respectively. The fund also held a slight overweight position in OZ Minerals (OZL), which received a revised takeover bid from BHP, valuing the copper miner at $28.25. Nickel Mines (NIM) was the fund’s best performing stock in November, up 33.56% for the month, which the fund held an overweight position. On the other hand, Lithium miners underperformed in November on the back of Tesla’s weak vehicle sales report. Lithium stocks have had a good run in recent months; therefore, a pullback was not unexpected.

Interest rate sensitive sectors such as Real Estate, Technology and bond proxy styled Infrastructure also performed well as a CPI miss sparked hopes that the RBA would soon pause its rate hike cycle. Goodman Group (GMG) is the fund’s only exposure in the Property Trust space, which rallied 12.47%. Transurban (TCL) also firmed 7.7% as bond yields declined.

On stock basis, shares in CSL surpassed the $300 level for the first time in more than a year as investors anticipated a worse than normal flu season in the US. Shares in Commonwealth Bank (CBA) hit its all-time high in November. The fund remained bullish on the Big 4 banks and Macquarie Bank (MQG). Our COVID recovery picks, Webjet (WEB) and Viva Leisure (VVA) travelled well as normality returned. Aussie Broadband (ABB) firmed 12% in November as the newly proposed NBN fee structure highly favoured ABB.

The fund returned 5.29% for the month, slightly below market. In terms of sectors, Energy had a stellar month as OPEC+ and allies announced the biggest on record production cut, adding more pressure on an already tightly supplied oil market. Other sectors that were negatively affected by the interest rate & recession fears such as Real Estate and Consumer Discretionary also rallied across the board. Stock wise, shares in Qantas (QAN) rose 16% as the Flying Kangaroo expected to be back in black by the end of December, buoyed by strong travel demand despite high fuel cost headwind. October saw an across-the-board rally amongst the banks as investors expected an improvement in Net Interest Margin (NIM) as a result of higher interest rates.

Shares in NAB, ANZ, WBC and MQG traded higher in anticipation of their full year results due in late October/early November. Bond sensitive stocks such as Transurban (TCL) and NextDC (NXT) also recovered as the Aussie 10y bond yield dipped below 4%. It is also interesting to note that the Aussie 10y bond yield is now below the US counterpart, a feat that has not been seen in 2018. In the mid to small cap space, shares in Jumbo (JIN) and the Lottery Corp (TLC) trended higher, leading up to the $160m Powerball. HUB24 (HUB) rallied 21%, as the wealth platform operator recorded $3b in net inflows for the September quarter, bringing its Funds Under Admin to $68.4b.