CONTRIBUTORS
Reece Birtles
Chief Investment Officer, Martin Currie Australia
Our biggest concern following our analysis of Australia’s August 2024 reporting season is that the results and company communications seem to echo the poor conditions we experienced back in 2019, a period overshadowed by the subsequent Covid years. However, the market's stock price reactions appear to be disregarding any evidence that contradicts the 'Goldilocks' narrative for the economy, leading to rising prices without the support of earnings growth.
The market appears overly hopeful about the positive impacts of lower inflation and interest rates. On the other hand, macro data such as falling purchasing manager indices (PMI) readings and consumer confidence measures, the exceedingly negative management guidance, ongoing dividend conservatism and the tone of our company engagements and the rise of the ‘value conscious consumer’ suggest a need for caution and to really be careful what you wish for.
The market's exuberance has resulted in valuation spreads between cheap and expensive stocks reaching near extreme levels. This dispersion has negatively impacted active manager performance over the past 12 months, particularly those exposed to value factors. Yet, this presents an opportunity moving forward, despite the negative outlook. In today's environment of wide valuation spreads and potential rate cuts, it is likely that cheap stocks will prove more defensive than the expensive growth stocks.
While pinpointing an exact turning point in market sentiment is challenging, it remains crucial for investors to be discerning in their stock selection. Focus should be on companies with pricing power, resilient volumes, and the capacity to manage margins, while avoiding those with valuation risk. We believe that growth-style stocks remain expensive, while value stocks are still cheap relative to historical standards.
As the large spread between value and growth unwinds and the market refocuses on valuations based on true earnings fundamentals, the conditions for Martin Currie Australia's (MCA) style strategies to outperform their total return and/or income objectives remain convincing.
Our bi-annual reporting season paper will cover the following:
- A review of the economic backdrop to Australia's August 2024 reporting season;
- Our analytical and fundamental review of the results for S&P/ASX 200 stocks;
- Examples of insight gained through our company interactions;
- Thoughts on market valuations and the potential for undervalued value stocks; and
- How our key Australian equity strategies are positioned for the conditions.
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