CONTRIBUTORS
Reece Birtles, CFA
Chief Investment Officer,
Martin Currie Australia
Australian equity valuations continue to be near record highs. The gap between the most expensive and cheapest stocks remains at extreme levels, and index-driven flows continue to push up the prices (and index weights) of the largest Australian stocks.
This reporting season, even modest earnings result surprises have driven outsized rewards and punishments in terms of price reaction, highlighting new and growing risks and opportunities for long-term investors who follow both passive and active investment approaches.
In our latest reporting season wrap, we delve into how our investment team is cutting through the noise to find the Australian companies where fundamental earnings generation will drive long-term capital and income returns in the coming months and years.
Key takeaways:
- Limited earnings surprises, but outsized price reactions and downgrades: Even small beats or misses were heavily rewarded or punished, with limited correlation between new news, economic drivers and alpha during the season.
- Dividends and capital management supported results: Special dividends, buybacks, and capital returns featured strongly, while leadership transitions in several companies coincided with downgrades and negative price moves.
- AI an emerging theme, but early: Over half of companies referenced AI in results, though most focussed on pilots and traditional machine learning; generative AI adoption remains limited but could shift industry economics over time.
- Index flows continue to distort markets: The prices of high index weight stocks are increasingly diverging from fundamentals, with small revisions translating into exaggerated price moves and reinforcing the concentration risk in these stocks.
- Valuations stretched, dispersion extreme: The gap between expensive and cheap stocks remains near record levels, creating both risks in high-flow large caps and opportunities in undervalued companies with stronger fundamentals.
- Implications for investors: For conviction-driven accumulation and income investors, mispricing presents opportunity, while risk-constrained investors may benefit from more nuanced, factor-controlled approaches. Across the board, active, disciplined stock selection remains essential to capture consistent capital growth and growing income going forward.
Important information
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