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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 as a whole. In today's environment of wide Valuation spreads and potential rate cuts, it is likely that today's 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 in finer detail:
- 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 equities strategies are positioned for the conditions.
Important information
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
The analysis of Environmental, Social and Governance (ESG) factors forms an important part of the investment process and helps inform investment decisions. The strategy/ies do not necessarily target particular sustainability outcomes.
It is not known whether the stocks mentioned will feature in any future portfolios managed by Martin Currie. Any stock examples will represent a small part of a portfolio and are used purely to demonstrate our investment style.
Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- The strategies may invest in derivatives (index futures) to obtain, increase or reduce exposure to underlying assets. The use of derivatives may restrict potential gains and may result in greater fluctuations of returns for the portfolio. Certain types of derivatives may become difficult to purchase or sell in such market conditions.
- Income strategy charges are deducted from capital. Because of this, the level of income may be higher but the growth potential of the capital value of the investment may be reduced.