Market Insights
Australian equity markets rose in July, with the S&P/ASX 200 Accumulation Index returning +2.3% for the month, +4.7% year to date.
The month was dominated by an AI-related sell-off in global markets, notably due to the size of the fall, South Korea was down -23.7%. The ASX outperformed most developed markets given its limited AI exposure and regional stability, and the S&P 500 finished roughly flat at -0.1%.
Domestically, the June quarter inflation data came in slightly softer than expected, with the trimmed mean printing at 0.8% for the quarter and 3.6% year on year, below the RBA’s own forecast of 3.8%. The downside surprise saw market pricing for an August rate hike collapse. This followed with the RBA leaving the official cash rate unchanged at 4.35% in August.
The labour market remained tight, with unemployment steady at 4.4%, while national housing prices softened further with an average decline of -0.4%. In her address on 11 August, Governor Michele Bullock’s remarks were widely categorised as a “hawkish pause”, reiterating the Bank’s preparedness to raise the cash rate further if required.
- Energy was the standout sector, returning +12.2% for July as Middle East tensions continued to flare and both refiners Ampol (ALD) and Viva Energy (VEA) pointed to strong earnings, driven by continued refining margin improvement. The Energy sector is now up over +20% for the year, with earnings expectations up almost 50%, although the sector has derated on a PE basis, implying the market believes the conflict will be resolved and is not ascribing value to the shorter-term oil price spike.
- Financials were also strong, up +5.8%, driven by the banking sector in spite of the headwinds the banks face from softer home loan growth, lower house prices and potential bad and doubtful debts.
- Information Technology (-4.8%) and Industrials (-1.4%) were a drag on the market as the AI sell-off, combined with concern that the Fed could raise rates later in 2026, weighed on technology names, although Wisetech (WTC) bounced +10% in spite of continued governance concerns.
Performance was heavily skewed by size.
Large caps surged, with the ASX 20 up +3.7%, while the S&P/ASX Small Ordinaries Accumulation Index fell -3.2%, a spread of close to 7% as the market favoured defensiveness and liquidity ahead of reporting season.
There was also significant factor divergence as the market followed US leads and rotation towards defencives: Value and Beta were the standout factors in July, followed by Size, while Quality lagged slightly and Growth was the worst performing factor.
In commodity markets, Brent crude rose more than +24% as oil rebounded to around US$90 per barrel. Gold equities rose around +1% on safe-haven demand. The lithium complex was hit hard, with Liontown Resources (LTR) down -35.2% and PLS Group (PLS) down -17% as lithium prices continued to reverse recent gains. Iron ore also fell on concerns around a prolonged China property downturn and increasing global supply, including the ramp up of the Simandou operations in Guinea.
Globally, concerns around the pace and economics of investment in artificial intelligence were heightened by several developments, including Meta’s decision to offer excess computing capacity externally, the release of Moonshot’s Kimi K3 model, and widening US hyperscaler bond spreads.
In my view, the sharp dispersion between sectors, sizes and factors in July reinforces the importance of disciplined active management, and rotation of this magnitude creates opportunity for bottom-up investors focused on high-quality companies that can compound value irrespective of economic noise.
Outlook
As always, we premise our views with: We do not attempt to forecast markets, as we do not believe this possible. However, we do apply stringent risk and macroeconomic overlays to our investments. We train ourselves to think long term and not be distracted by short-term thinking or market fluctuations.
We believe that investors should focus on high-quality companies with resilient business models, strong balance sheets, and a proven ability to navigate complex environments. Domestically, we believe the softer June quarter inflation print gives the RBA room to extend its pause.
Although the debate over the cycle direction is likely not yet over: sticky services and housing inflation, a labour market that has held unemployment below 4.5% for 55 consecutive months, easing financial conditions and an emerging data centre investment boom all point to the possibility of one further hike.
Uncertainty also remains elevated while a resolution to the Middle East conflict and the re-opening of the Strait of Hormuz remain unclear.
We believe that this uncertainty also creates investment opportunity, particularly in high-quality companies, as they benefit from stronger balance sheets, better moats and more resilient earnings.
The key themes we are focused on for the period ahead:
- August reporting season: corporate earnings will be viewed through the lens of margin durability rather than headline revenue growth. With household budgets strained, we expect the market to focus on softening sales volumes and evidence of discounting in Consumer Discretionary and housing-exposed segments. FY27 earnings forecasts have already been trimmed through July.
- The trajectory of domestic inflation and the RBA cash rate, including the full impact of higher oil prices as they flow through the system.
– Energy supply risk: the market is not ascribing value to the oil price spike, yet arguably a risk premium should apply given medium-term supply risk as the Middle East rebuilds infrastructure and the vulnerability of the Strait of Hormuz is assessed.
- AI capital expenditure scrutiny: questions around the funding and returns of large-scale technology infrastructure investment are driving sharp rotation, creating valuation opportunities in oversold quality names.
- The size divergence: the rotation away from small companies and Resources has left valuations compelling in a number of areas that are out of favour, with a more supportive rate environment a potential catalyst for these discounts to close.
Our investment philosophy is unchanged. We seek businesses with strong balance sheets, enduring competitive advantages, aligned management teams and attractive valuations: companies that can compound value irrespective of economic noise.
With reporting season ahead volatility is likely to increase, particularly given the sharp divergence in share price performance across sectors and individual stocks in recent months.
If recent reporting seasons are any guide, relatively small changes to earnings expectations can result in significant share price movements.
Commentary on Blackwattle’s Funds
We will make mistakes and missteps. But rather than hide from our mistakes, as an investment team we strive to learn from them. This is one of our unwavering commitments.
This month, five of our Funds outperformed their respective benchmarks.
Equity Income Fund click here
Small Cap Quality Fund click here
Small Cap Long-Short Quality Fund click here
Mid Cap Quality Fund click here
Large Cap Quality Fund click here
Long-Short 130/30 Quality Fund click here
1: The Blackwattle Mid Cap Quality Fund, Large Cap Quality Fund, and Long-Short 130/30 Quality Fund’s inception dates are 8 August 2023. The Blackwattle Small Cap Quality Fund’s inception date is 12 September 2023. The Blackwattle Small Cap Long-Short Quality Fund’s inception date is 21 November 2023. Blackwattle Equity Income Fund inception date is 12 February 2026. 2. Small Cap Long-Short Quality Fund Returns are normalised for the removal of unallotted applications, following the transition of Investment Manager of the Fund. There was a six-month transition period beginning 21 November 2023 and ending 21 May 2024, following the transition of Investment Manager of the Fund. During this transition period, the Fund Benchmark was 50% cash rate as determined by the Reserve Bank of Australia and 50% S&P/ASX Small Ordinaries Accumulation Index 3. Benchmark: Long-Short 130/30 Quality Fund and Large Cap Quality Fund is S&P/ASX 200 Accumulation Index, Mid Cap Quality Fund is S&P/ASX300 Accumulation Index-S&P/ASX20 Accumulation Index, Small Cap and Small Cap Long-Short Quality Fund is Small Ordinaries Accumulation Index, Equity Income Fund is S&P/ASX 100 Total Return Index: 75% / RBA Cash Rate: 25%. All returns are calculated after fees have been deducted and assume distributions have been reinvested. No allowance is made for tax when calculating these figures. Past performance is not a reliable indicator of future performance. Source: Apex.
Blackwattle Large Cap Quality Fund
The fund returned +2.24%, underperforming the benchmark by 0.02% net of fees.
Key Contributors: Perpetual (PPT) received an unsolicited, non-binding, conditional bid from EQT AB at A$21.64 cash per share on 1 July, subsequently revised higher twice to A$22.50. AMP (AMP) performed strongly after upgrading first half 2026 Net Profit After Tax expectations to between A$170m and A$180m, driven in particular by a stronger contribution from its China partnerships. Ampol (ALD) also contributed, as Middle East tension kept refining margins elevated and ALD guided to a Lytton Refiner Margin averaging US$28.26 per barrel for the first half of 2026, well above the US$7.44 delivered in 1H2025.
Key Detractors: The fund’s underweight in CBA (CBA) detracted given the performance of the banks over the month, however we remain comfortable to be underweight given valuations and the risks the sector faces from lower home loan growth, a weaker consumer and potential margin compression.
Blackwattle Long-Short 130/30 Quality Fund
The fund returned +3.08%, outperforming the benchmark by 0.82% net of fees.
Key Contributors: Perpetual (PPT) and AMP (AMP) in the Financials sector, together with Ampol (ALD), were the key long-book contributors, for the reasons outlined above. The short book contributed significantly to returns in July as the fund was short a number of lower quality, speculative names. Given the volatility around the Middle East conflict, the fund held a number of pair trades to manage risks.
Key Detractors: The fund’s underweight in CBA (CBA) detracted from performance, as outlined above.
Blackwattle Mid Cap Quality Fund
The fund returned -1.07%, underperforming the benchmark by 0.65% net of fees.
Key Contributors: Guzman y Gomez (GYG) rallied +18% in July on earnings upgrades from the withdrawal of the US business and supportive analyst research into reporting season, forcing short covering in a highly shorted stock. GYG is leading the modernisation of quick service restaurants in Australia, with franchisee returns that are market leading and a roll-out of 30+ new stores per annum. While we view GYG as an ‘Early Quality’ business, we see significant upside if the business model is executed at scale.
Key Detractors: PLS Group (PLS) fell -17% in July, following a -22% drop in June, as lithium prices continued to reverse recent gains. We see this price volatility as normal for a still nascent commodity. A site visit in June reinforced Pilgangoora as one of the largest and highest-quality hard-rock lithium deposits in the world, and we continue to view PLS as an ‘Improving Quality’ business and one of the most compelling lithium equities globally.
Blackwattle Small Cap Quality Fund
The fund returned -5.05%, underperforming the benchmark by 1.89% net of fees.
Key Contributors: Vysarn (VYS) rose +12.3% following its preliminary FY26 result, which demonstrated revenue and earnings growth both greater than 30%, along with a solid FY27 outlook. Vysarn also announced the ~37% EPS accretive acquisition of Welltech, adding water infrastructure construction and field services capability across the platform.
Key Detractors: Megaport (MP1) fell -16.1%, consolidating after a period of rapid appreciation driven by new AI infrastructure contracts and the establishment of an on-demand GPU pool. AI adoption continues to accelerate globally, expanding the addressable market for Megaport’s platform. Zip Co (ZIP) fell -21.3%, taking a breather following a +109% gain in the June quarter, with no significant company-specific news driving the move. We continue to view Zip as well positioned for medium-term growth given the early stage of BNPL penetration in the US.
Blackwattle Small Cap Long-Short Quality Fund
The fund returned -6.60%, underperforming the benchmark by 3.44% net of fees, following a period of strong outperformance.
Key Contributors: Vysarn (VYS), up +12.3% on its preliminary FY26 result and the accretive Welltech acquisition, as outlined above.
Key Detractors: Megaport (MP1), down -16.1%, and Zip Co (ZIP), down -21.3%, detracted as risk-off sentiment drove a sharp rotation away from smaller companies and technology names. We retain conviction in both businesses over the medium term.
Blackwattle Equity Income Fund
The fund returned +1.74%, underperforming the reference index by 0.42% net of fees. This represented a 63% capture of the S&P/ASX 100 Total Return Index, slightly below our target capture of 75%; a performance lag in a strongly rising market is expected for a covered call income strategy, and the option premium earned provides a valuable cushion in periods where the market weakens.
Key Contributors: BlueScope Steel (BSL) benefitted from continued strength in the US steel market and expectations for further earnings momentum. Amcor (AMC) rose +3.1% as global FMCG volumes showed resilience and the Berry Global integration gains continued to flow through. The fund’s nil position in Lynas Rare Earths (LYC), which fell -22% on production misses and a significant cost overrun, also contributed.
Key Detractors: Goodman Group (GMG) fell -4.4% as investors expressed growing wariness around the capital intensity of the AI data centre transition; notwithstanding these shorter-term concerns, we continue to like GMG’s structural position, including its secured 6.0 gigawatt global power bank. The fund’s underweight to the big four domestic banks also detracted as the sector rallied strongly; our preference in Financials remains the insurers, with a new position in Suncorp Group (SUN) established during July alongside QBE (QBE) and IAG (IAG). The fund also exited Qantas Airways (QAN) and Virgin Australia (VGN).
Gratitude and Commitment
To our clients and partners – Thank you.
It is a privilege to represent your capital and hold your trust. We remain committed to investing alongside you, ensuring our interests are always aligned with your own. We re-iterate the commitments to our investors:
- We will always commit our own capital alongside your own.
- We will never allow personal trading.
- We will always constrain the capacity of our Funds.
- We will learn and improve from our mistakes.
- We will act with transparency.
Kind regards,
Michael Skinner CIO and Managing Director, and the entire Blackwattle Team
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