Rudi’s Comprehensive August 2024 Review

Download related file: FNArena-Reporting-Season-Monitor-August-2024

A compilation of stories relating to the August 2024 corporate reporting season in Australia, including FNArena’s final balance for the season (attached).

Content (in chronological order of publication):

-Corporate Earnings, The Best Indicator?
-What Can August Deliver?
-Morgan Stanley’s August Season Hot Picks
-Aussie Banks
-August Results; Polarisation & Divergence
-Where’s Conviction?
-August Results: Early Beginnings
-August Paints A Bifurcated Picture
-August Trends Have Darkened
-August Results Fail To Inspire
-Post-August Best Ideas
-Key Picks, Best Buys & Conviction Calls
-Defensives, Healthcare, Resources & Data Centres
-Banks, Miners & Quality Small Caps
-FNArena Talks: Videos

By Rudi Filapek-Vandyck, Editor

Corporate Earnings, The Best Indicator?

Today’s markets are confusing many, not in the least because many traditional indicators don’t seem to apply anymore.

Us, humans, we like to at least have some sense of control or predictability about things, and when that “security” drops away, we feel uncomfortable.

This, to a large extent, explains why today’s bull market has not been widely embraced as a positive phenomenon. There are way too many contradictions involved.

When the Federal Reserve (and other central banks) embarked on a steep tightening path in early 2022 it didn’t take long for bond markets to invert; whereby short-term yields exceed those further out on the yield curve, which is a classic signal that economic recession is on the horizon.

The US yield curve started inverting in mid-2022. Two years later, the expert community is still debating whether there will be negative economic growth or not. Locally, the official statistics have remained in positive territory because of seldom-witnessed immigration influx.

The RBA might yet deliver one more rate hike, but other central banks outside of outlier Japan are all preparing for policy loosening, i.e. rate cuts. The global policy reversal has already started, now also including the RBNZ.

Bond markets in Europe and the USA have already started to price-in rate cuts before year-end. Clearly, this is a positive for equity markets as long as that anticipated economic recession does not follow next.

Can investors simply rely on financial markets getting it right? Of course not! Markets reason in the here and now and if/when signals change down the track, they simply re-adjust accordingly without blinking first.

2024: The Big Dichotomy

A lot is being written about the dichotomy in share markets where a small selection of strong performers keeps pushing indices to fresh all-time record highs, leaving behind a large majority that simply cannot catch a bid, outside of the occasional attempts for momentum reversal.

There’s an even greater contradiction happening between numerous traditional indicators pointing at economic recession and economies simply refusing to play to that script.

With the bulls firmly in charge of share markets, the bears have their indicators to rely on, but little else. Sour grapes, heartache and migraines, maybe?

Calls and predictions of a severe share market correction, let alone a crash, have been well off the mark and completely out-of-sync with markets that rally further into blue sky territory.

In defence of the many Cassandras, today’s dichotomy surrounding some of the most used indicators is quite remarkable, and possibly unprecedented. It might even elicit the occasional observation that this time, indeed, things do look different.

Apart from the two year versus 10 year yield curve (we know bond markets don’t always get it right), the equally closely followed ISM index, believed to be in lock-step with economic momentum albeit more skewed towards manufacturing, has generated a negative reading for 19 out of the past 20 months. March this year is that one positive exception.

To date, there has been no previous precedent of this magnitude. If history were a carbon copy for today’s world, economies would be in deep doo-dah by now. But they are not.

Another indicator that turned strongly negative at the end of 2022 was M2 money growth in the US economy. This is why so many remained sceptical about equity markets throughout 2023. But M2 money growth has again turned positive.

The latest indicator to raise eyebrows is the so-called Sahm rule’ that stipulates when US unemployment rises by 0.5 percentage points (or more) from its trough, economic recession will follow next. That increase is measured from the three-months moving average in the official unemployment rate. Economists will tell us the Sahm rule has accurately predicted all American recessions in the modern era.

But in light of all the other failed indicators, is 2024 the exception that breaks this indicator’s perfect track record?

Corporate Earnings & Valuations

The general picture doesn’t change when we zoom in on what has transpired in share markets since October last year.

After that strong rally from (in hindsight) beaten down levels, markets have been flashing overbought warnings since early 2024 and in-house sentiment indicators at the likes of Citi and Macquarie are suggesting sentiment is too hot’ overall, but July yet again is paying no attention.

Share markets are trading on multiples that look elevated by historical standards, nobody denies it, but this is at the same time where general agreement stops. Are Nvidia shares really in a bubble when its EPS has grown by 452% in FY24, with a further 100%-plus to follow for the current financial year?

Yes, it is true, only 24% of stocks in the S&P500 have outperformed the index over the first six months of the year, possibly an all-time low, with the equalweighted index only up 5%, not that different from indices locally.

But there’s equally a valid argument in that those outperformers are carried by strong growth, supported by megatrends such as GenAi, data centres and GLP-1s, also offering a lower-risk profile in light of higher-for-longer bond yields, a tepid deceleration in inflation, and still valid questions about the outlook for economies.

To further add to that argument: earnings for the so-called Magnificent Seven grew by 51.8% year-on-year in Q1. For the rest of the pack, the comparable number is only 1.3%.

As pointed out by more supportive market observers: earnings forecasts, in particular for Gen.Ai-related beneficiaries, have continued rising, which has subsequently translated into further share price gains.

The not-so-supportive sceptics have a point though: earnings growth cannot possibly keep going at current breakneck pace.

At some point, one has to assume, at least a pause in the uptrend will announce itself. Whether that pause shows up in the upcoming Q2 results season in the US looks highly questionable, but investors shall soon find out.

Two reasons for investors to not throw caution in the wind, either today or later:

-when stocks trade on high multiples small downward changes can have a rather large impact on modelled valuations and the share price

-there’s a lot of crowding going on in today’s share market winners. If/when parts of these funds start flowing elsewhere this too can have an outsized impact in the moment

Market consensus is currently positioned for 8.8% earnings growth in Q2 on average for the S&P500. If this number survives the actual results, Wilsons points out it will mark the strongest year-on-year growth since Q1 of 2022 when 9.4% was achieved. Eight of eleven sectors are expected to report growth in Q2.

Currently the average multiple for the S&P500, forward-looking, is 21x but Wilsons points to the fact that multiple drops below 18x when one strips out the winners from the technology sector.

That median multiple ex-Mag7 doesn’t look extremely bloated at all and would allow for a broadening of the (out)performers in the share market, on the proviso other sections of the market also start reporting positive earnings growth.

In The Land Of Down Under

In Australia, the polarisation underneath share prices has not been dissimilar. Banks and resources are having a relatively tough time (operationally) and one of key differences is average EPS growth for the ASX200 is negative for FY24 (the financial year just concluded). Forecasts are more positive for FY25, but nowhere near the numbers seen in the US.

As things stand right now, only weeks out from that all-important August results season locally, consensus sees average EPS for the ASX200 contracting by -3.5%, having already contracted by -3% a year ago in FY23. The forecast for FY25 is a positive 5.8% which, if proven correct, also implies a broader, better growth environment.

The local PE multiple sits around 16.5x, which is equally above the long term average, but I’ve explained earlier we’re no longer comparing apples with apples when comparing to the past as the local index has gone through impactful changes in composition. That, plus an equally bifurcated share market means the local market too could grow into its multiple if/when earnings growth shows up for today’s laggards.

Readers who pay attention to these numbers will have noticed analysts’ expectations locally have also improved over the weeks past. This despite the fact there remain plenty of companies for whom forecasts are deteriorating, albeit, it has to be pointed out, largely because of mid-year sector updates on miners and energy companies.

A lot has been written about how cheap shares in today’s lagging sections of the local share market seem, including for small and micro-cap companies, for cyclicals, and for REITs generally, and with the ECB and Fed ready to start cutting interest rates in a few months’ time, it is possible local laggards will enjoy a come-back simply because of the global copy-effect.

Locally, one would hope the RBA does not hike in August, but apparently that is the typical view from someone who has a mortgage in Australia. I do believe the value’ proposition on the ASX is muddied because parts of the economy are arguably in a recessionary condition with underlying trends still deteriorating, which means the risk for profit warnings remains high, either this month or in August.

At the same time, the winners from the past 18 months are not by default awaiting a pause or a break in their growth trend. The risk of selling out too early remains, even if local Growth stocks could be sucked in by any correction in share market winners in the US.

One factor that might rise to investors’ attention in the months ahead is possibly a stronger Aussie dollar, thanks to the RBA being handcuffed by still too high local inflation trends.

But let’s first find out what local corporate profits and cash flows look like. In about two weeks’ time, the first small batch of corporate results will open the August season.

In the long term, beyond all these short-term impacts and considerations, investing in the share market remains closely related to corporate earnings. Fingers crossed we can all avoid the cluster bombs and booby traps (though some share prices weakening will present opportunity).

What Can August Deliver?

As August beckons, and analysts and investors are preparing for what promises to be a ‘lively’ reporting season, the market seems to pay no attention to the fact disinflation has become a rather stunted process in Australia, unlike other countries, and yet another CPI release that reveals more of the same might well trigger another RBA rate hike in August.

Goes without saying, a share market that refuses to lay down, other than the occasional hiccup, doesn’t seem to be priced for another negative surprise from the RBA, though such an unwelcome development is not guaranteed, of course.

We shall all find out more on July 31, when the local CPI numbers become public knowledge.

Analysts at Morgan Stanley think the RBA rate hike risk is larger than current price action is suggesting. They reminded investors on Monday the CPI in Australia has now accumulated for five consecutive months without declining. If this week’s CPI print doesn’t show weakness, and Morgan Stanley’s forecast is essentially for little movement since the prior update, that’ll make it six months of no noticeable decline.

Can the RBA stomach six months of stasis amidst a public debate about the economic stimulus coming from tax cuts and energy bill subsidies? The Trimmed Mean is expected to rise by 1% QoQ, which would see the annual rate of Trimmed Mean inflation remain at 4.0% YoY, above the RBA’s own forecast of 3.8% for June.

Maybe Morgan Stanley’s concern is unfounded and local market participants have adopted the view that even if the RBA decides to tighten, compensation is already in the pipeline through less tax and lower energy bills?

A share market that refuses to weaken meaningfully remains, of course, priced above historical averages. This need not be a major problem, not when there’s no economic recession on the immediate horizon, but when valuations are high, the bar is automatically lifted for corporate results, and companies better deliver, or else.

The safest prediction to make is that overall volatility will rise, and probably by a lot in the weeks ahead. This week’s CPI and the RBA meeting in August are each potential triggers, but there’ll be plenty to digest and to absorb throughout August.

Trends might seem straightforward when markets follow macro-economic indicators or broad top-down narratives, but when companies report their financials theoreticals and reality meet, and that can be vindicating and re-affirming as much as it can wipe out everything that has happened up until that point.

Corporate results matter. They provide confidence that everything is okay, or that the future will be okay. That confidence will be put to the test in August. And as history shows, the outperformers are not by default destined for failure and disappointment, no matter how hard some investors would like this to be the case, just like laggards might prove to be mis-priced, but not necessarily by default, and certrainly not all of them.

Corporate Results In The USA

Results season is also when first impressions can be quite deceiving, as we’ve all witnessed in the US last week with share prices in Tesla, Alphabet (Google) and UPS (among others) weakening upon quarterly market updates, pulling indices down, but does this mean corporate profits are not living up to expectations in the world’s most important market?

A cursory glance over the underlying statistics suggests US corporate profits are still doing fine. Some 79% of all reporters in the S&P500 is still managing to beat consensus on EPS, though only 58% is able to do so on sales.

The latter clearly indicates the US economy is slowing, but also that businesses are struggling with falling inflation, but higher costs and more reluctance in spending, which is also corroborated through transcripts of post-result conference calls between CEOs and professional investors.

Only 50% of US companies is currently able to beat consensus on both sales and EPS.

Analysts at RBC Capital observe how little changes are being made to analysts’ EPS forecasts, with consensus numbers essentially holding steady for this year and next around US$244 per share on average for the S&P500 in 2024, and US$278.50 for next year.

On numbers from S&P Global Market Intelligence, the current Q2 reporting in the US is actually increasing analysts’ forecasts for EPS growth with Q2 growth currently averaging 9.27% compared with expectations of 8.29% EPS growth pre-season (one month ago).

The biggest gainers, as far as market forecasts are concerned, are US Financials whose EPS growth has been revised up to 14.38% from 3.74%. But even IT is still experiencing net upward revisions with sector EPS growth now at 16.93% from 15.97%. The worst hit sector is Energy, where EPS growth has weakened to minus -1.76% from a positive 11.90%.

So far there has been no big deflation in growth forecasts for large cap winners, Gen.Ai or otherwise, and that creates one big question mark for those predictions about a new, multi-year era featuring a shift in market leadership in favour of small caps, cyclicals and ‘value’ in general.

August Is Key For Australia

What we are experiencing is merely a re-adjustment in portfolio weights and exposures, which probably has further to run. But as investors have already witnessed locally in Australia, many ‘value’ laggards that should benefit from a shift in central bank policy (though that’s not yet on the cards locally) are also the ones that continue to struggle with cost overruns, higher spending on capex and opex, and other operational challenges.

This is why the upcoming August results season might well prove more important than in previous years. Part of the investor community is positioned for a so-called Great Rotation into small caps and other laggards, but for such a switch to become sustainable, corporate results must be strong and healthy enough to maintain investor confidence.

We won’t know until we see the details. Until then, investors can but speculate and theorise, and debate the affirmatives and negatives on social media and elsewhere. The local results season starts this week with smaller caps Ansarada ((AND)), Credit Corp ((CCP)) and Centuria Industrial REIT ((CIP)), but in particular through larger caps Rio Tinto ((RIO)) on Wednesday and ResMed ((RMD)) and Block ((SQ2)) on Friday.

As has become the local tradition, the August season doesn’t genuinely ramp up until the 13th, and only floods friends and foes on Thursday and Friday the 21st and 22nd.

The local numbers look a lot different from those in the USA, with market consensus implying the average EPS for the ASX200 will be -3.5% weaker in FY24, with FY25 and FY26 to see positive growth around the long-term average at respectively 5.4% and 5.3%. As per always, any changes in dynamics for commodities can have a significant impact on those projections.

This potential heavy impact is perfectly illustrated through Macquarie’s numbers that suggest Australia’s EPS will fall by -6% for FY24 and then rise by 10% in FY25 assisted by a 23% upswing for the resources sector.

Among the questions that require an answer in August:

-Is momentum for Financials, including for insurers, financial platform operators and banks, strong enough to support ongoing strength? Analysts remain highly reluctant to project anything positive as yet for non-bank lenders, an observation that also applies for most listed asset managers.

The average forward-looking dividend yield for the ASX200 has now fallen to 3.7% which is well below the historical average of circa 4.5%, no doubt showing the banks have rallied very hard, while some of the commodity producers will be paying out less. Woodside Energy ((WDS)) comes to mind.

-The question for many a multinational: is momentum in offshore markets robust enough to compensate for local challenges? This divergence is popping up in August previews for the likes of BlueScope Steel ((BSL)), Car Group ((CAR)), and others.

-How strong is momentum for Gen.Ai beneficiaries exactly? Expectations remain positive and robust for prime beneficaries Goodman Group ((GMG)) and NextDC ((NXT)), but any positive Ai impact remains up for debate when it relates to JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Dicker Data ((DDR)), and others.

-How many asset write-downs are still forthcoming? Apart from REITs and property developers, it’s a ‘live’ question that also applies to Challenger ((CGF)) and Seek ((SEK)). BHP Group ((BHP)) has already come clean on this issue.

-Who’s next to announce more capital management through share buy-backs and extra pay-outs? Expectations remain positive for the banks, but plenty of other companies seem to have plenty of cash and franking credits, including coal companies.

-Where are the EPS downgrades? The underlying trend has stabilised in the weeks past, with even a slightly positive bias, but Macquarie analysts point out August almost always ends up pulling market forecasts lower. The last time August had a positive net impact on EPS forecasts was, apparently, in the higher-for-longer years of 2003-2006.

-Where are the capital punishments? Always a mystery upfront, but oh so painful when it hits the personal portfolio in the moment; that one downgrade that ruins the day. A negatively-biased Macquarie points out responses to US corporate results have been characterised by a negative skew with the underperformance in case of profit disappointment twice as large on average as any reward for a genuine ‘beat’.

A lot of attention and appraisals will revolve around corporate margins. Gold producers have continued to generate plenty of disappointments through June quarterly production updates. What about the healthcare sector? Margins are extra-extra important for share prices of CSL ((CSL)), Cochlear ((COH)), ResMed, but also for Integral Diagnostics ((IDX)), and others.

-Can investors be satisfied with the promise of a second-half catch up? Macquarie recently disappointed with its Q1 update, but the promise is for a much improved H2 which will make up for the slower start into FY25. Judging from the share price, investors are backing management in that promise. But can they/will they in case of others under a similar scenario? Companies that come to mind include Ramsay Health Care ((RHC)), Reliance Worldwide ((RWC)), Domain Holdings Australia ((DHG)) and Medibank Private ((MPL)).

-Where is the market completely wrong? There always is a queue of beaten down, out-of favour market laggards for which sentiment has become too bearish and analysts’ forecasts too low. This is fertile ground for a 20%-plus rally on the day of result release (in particular when the shorters are on board too). There is, however, also the other end of the market where share prices mimick Wile E Coyote when results are released with numbers well, well, well below expectations.

FNArena’s daily updated Short Report: https://fnarena.com/index.php/analysis-data/the-short-report/

-Serious downgrades pre-season are seldom good news. Macquarie analysts report companies for which forecasts fall by at least -20% prior to results season tend to have a higher chance for missing expectations when they release financials. Are currently included in that assessment: Sonic Healthcare ((SHL)), Seek, Ramsay Health Care, IDP Education ((IEL)), Domino’s Pizza ((DMP)), Downer EDI ((DOW)), and nib Holdings ((NHF)), as well as Collins Foods ((CKF)), Nufarm ((NUF)), Eagers Automotive ((APE)), and Star Group Entertainment ((SGR)).

Do note: Collins Foods and Nufarm do not report in August.

-On the other side of the ledger, companies for which growth forecasts in advance increase by 20% and more are ususally a fertile group for upside surprises. Macquarie has identified Aristocrat Leisure ((ALL)), Steadfast Group ((SDF)), Pro Medicus ((PME)), ALS Ltd ((ALQ)), and REA Group ((REA)).

Aristocrat Leisure does not report in August.

-There will be more M&A. Market expectations continue to build. Simply look at share prices for Macquarie Group ((MQG)) and Computershare ((CPU)), even the ASX ((ASX)). Guzman Y Gomez ((GYG)) has a few things to prove too.

Next week we’ll dig deeper into specific sectors and individual companies.

Morgan Stanley’s August Season Hot Picks

Ahead of August, analysts at Morgan Stanley have picked and communicated their six conviction ideas among ASX-listed small and mid-cap companies:

-Jumbo Interactive ((JIN))
-Audinate Group ((AD8))
-Superloop ((SLC))
-Life 360 ((360))
-Premier Investments ((PMV))
-SG Fleet ((SGF))

Aussie Banks

One of THE big surprises so far in 2024 has been the sharp outperformance of Aussie bank shares when just about everyone called them “expensive”, if not “extremely over-priced”.

But come hail, snow or extreme heat, nothing was going to stop CommBank ((CBA)) shares to set a new all-time record high or its peers reaching for new multi-year highs (they’ve had a whole decade-and-a-half of no progress, so cut them some slack, please).

We’ve seen movies like this before, but 2024 is playing a rather extreme version of it: those “expensive” and “over-priced” banking shares outperformed the broader market by no less than 1500 basis points throughout the first seven months, reports JP Morgan. That amounts to 15% more return than the ASX200 including dividends for mere mortals like us.

Goes without saying, what looked “expensive” and “over-priced” back in January, must be even more by now. True to form, there’s isn’t a bank on the ASX whose shares are currently not trading above the average target set by brokers monitored daily by FNArena, unless you’re Suncorp ((SUN)).

Indeed, even Judo Bank ((JDO)) and Bank of Queensland ((BOQ)) are trading at valuation “premiums” these days.

Logically, there’s isn’t a single Buy rating in sight for any of the Big Four and all six ratings for CommBank in the FNArena universe are Sell.

Before we start throwing mud towards the stockbroking analysts who’ve had to endure a lot of mocking and questions from clients and daytraders, no doubt, let’s also consider the local funds management industry has seldom been as underweight the sector as in 2024.

Wait! This story gets weirder, still. JP Morgan has gone through the local bank registery data and noticed retail investors are selling too. Apparently, the selling by retail investors has been at the fiercest pace since June 2021.

But if stockbrokers aren’t buying, and neither are their customers one presumes, and local fund managers aren’t either, and now retail investors are jumping ship as well, who’s left to keep the positive momentum ongoing?

My own knee-jerk response is to look internationally where banks have been very much the flavour of the year on expectations of central banks loosening interest rates, but JP Morgan has found an intriguing alternative explanation in the latest quarterly registry updates by the banks: “domestic institutions”.

JP Morgan suggests this refers to Australian super funds. Other data up until December have been indicating super funds have been increasing their active weights for the industry, with exception of CommBank. And that’s the sector leader whose premium vis a vis the consensus target set by stockbrokers, also in comparison with the other banks, might well never have been as high as it is in 2024.

Go figure.

JP Morgan’s view remains the same: Australian banks are over-valued to the magnitude of 16%. The broker’s Model Portfolio remains heavily underweighted the sector. According to JP Morgan’s data analysis, local fund managers are now the least exposed to the sector since it started gathering data on the industry.

Still, some 11% of funds are currently sitting on an Overweight position, the lowest percentage since July 2020.

August Results; Polarisation & Divergence

It’s difficult to keep the focus on corporate market updates when panic selling is causing risk assets to suffer heavy retreats in August. This is not about investor exuberance, concentrated market positions or inflated valuations, even though these items combined were responsible for US share market conniptions in late July.

What markets are experiencing since last week is the unwinding of the so-called Yen carry trade. This practice whereby hedge funds and large asset managers borrow money in low-cost Japan and then invest those borrowings in risk assets in high-yielding currencies has been in place for many years.

The Bank of Japan’s unexpected rate hike last week upset the apple cart and many of such positions -worth hundreds of billions of dollars- are being unwound in rapid manner. All at once and at the same time, of course. The impact on equities worldwide is there for everyone to see.

So don’t beat yourself up if you didn’t anticipate this violent change in overall dynamics, very few did. It’s a process and it will simply have to run its course.

Other factors that have been contributing to the rather downbeat sentiment overall at the start of August are more signs of slowing for the US economy and increased scepticism among investors about shorter-term benefits from large investments in Gen.Ai by large cap US companies.

Investors have reminded themselves the prospect of lower interest rates (Fed cutting) is only immediately positive if economic growth and corporate profits hold up. If/when the Federal Reserve needs to loosen policy because the world’s largest engine is starting to cough and splutter, that becomes a negative and easily explains why commodities and small caps are yet again on the nose this month.

Investing in accordance with the cycle is a lot easier said than done, plus the market can be a very unreliable guide; it changes its mind in less than a heartbeat, leaving many to ponder what ifs’ and look for answers after the damage is done.

August Results: Polarisation & Divergence

Nothing lasts forever, this too will come to pass, eventually, and corporate results will yet again become important when the dust has settled.

Take ResMed ((RMD)), for example. On Friday, the company’s June quarter financial result revealed a much stronger-than-forecast gross margin, with the promise of ongoing improvement in FY25.

This is important on multiple levels. Firstly, disappointing margins is what put downward pressure on the share price last year (it wasn’t all about GLP-1s).

Management did get the message and made sure the next quarterly update in late January included better margins. That was a big tick for share price recovery, but freight costs had spiked higher in the meantime because Israel-Hamas happened and  the Houthis in Yemen are forcing shipping routes to divert via the longer route around Africa.

On Friday, ResMed’s quarterly wiped those market concerns off the table, including any short-term impacts from GLP-1s, and instead convinced analysts and investors the world’s leading CPAP company remains poised for yet another strong year ahead.

Corporate margins are one of the focal points of investors this month, so ResMed’s margin surprise might bode well for other companies, including fellow healthcare sector stalwarts Cochlear ((COH)) and CSL ((CSL)). The revival of quality healthcare companies is one of the narratives that will be put to the test by investors this month in Australia.

There’s no sense of sector uniformity, though, and many expert voices remain cautious, if not negative about the immediate prospects for healthcare companies including Healius ((HLS)), Sonic Healthcare ((SHL)) and Nanosonics ((NAN)).

Ramsay Health Care ((RHC)), suggested by many as a potential disappointer this season (yet again), truly delivered on Monday as the private hospitals operator pre-released a disappointing FY24 update. But amidst the general carnage on the day, Ramsay shares only experienced a minor dip.

Some analysts believe earnings are now at their low and improvement should follow. The share price is well below analysts’ price targets, even if estimates have to be reduced further. The last time Ramsay shares traded in the mid-$40s was back in 2014. That’s a whole decade ago.

The August results season has only just started and already it is offering up different dilemmas and opportunities for different types of investors. The question whether one feels more comfortable hiding in beaten-down share market laggards or in structural growers with many more years of accumulating wealth ahead is quickly becoming less a question of valuation’, but more so of what kind of investor are you?

Polarisation and divergence are also expected to dominate the banks this time around with sector analysts at Citi predicting the outlook for net interest margins (NIMs) will surprise, but not for all banks equally, and not to the extent that current share prices can be justified.

Consequently, say Citi analysts, “we think the earnings season will be much more important in dictating relative preferences within the sector.” Citi’s preference resides with Westpac ((WBC)) and CommBank ((CBA)) but, equally important, this is a relative call, not on absolute terms.

A reminder: CommBank and Bendigo and Adelaide Bank ((BEN)) are the only ones to report FY24 financials in August, with the others merely releasing less-detailed quarterly market updates.

The thesis of ongoing divergence in between companies grouped together in the same basket(s) also very much stands out from Citi analysts’ preview to August. The broker’s highest concentration of positive surprises is expected from Large Diversified Miners, Consumer Discretionary and REITs. Most negative surprises are expected to come from Metals & Mining, Healthcare, and REITs.

The narrative of ongoing resilient consumer spending in Australia is one that will be equally put to the test. Any concerns about Gen.Ai beneficiaries are pretty much non-existent at this stage. Australia doesn’t have megacaps spending billions on future development, with the likes of Goodman Group ((GMG)) and NextDC ((NXT)) instead among prime beneficiaries of those unprecedented investments.

Goodman Group continues to be singled out for a positive surprise when the company reports.

Where’s Conviction?

As this week’s global rout in shares reduces any limitations and concerns based on valuation’, let’s focus on where analysts think investors most likely will be positively or negatively surprised.

UBS strategist Richard Schellbach sees lots of potential for upside risks, also because management teams are cutting costs to cushion profit margins from ongoing pressures. In some cases, while sales might be slowing, a better-than-anticipated profit margin a la ResMed could prove the saviour.

Companies singled out include AGL Energy ((AGL)), Brambles ((BXB)), Car Group ((CAR)), Insurance Australia Group ((IAG)), Flight Centre ((FLT)), Suncorp Group ((SUN)), Super Retail ((SUL)), and WiseTech Global ((WTC)). The latter is remarkable as WiseTech is mentioned elsewhere for a potential disappointment a la August last year.

UBS also sees potential for some of the market laggards to surprise, including Lendlease ((LLC)), Perpetual ((PPT)), and Reliance Worldwide ((RWC)).

Have been singled out for a potential negative nasty: ResMed (thesis dismissed last Friday), alongside Origin Energy ((ORG)), JB Hi-Fi ((JBH)), CommBank, Orora ((ORA)), Domain Holdings Australia ((DHG)), Reece ((REH)), Ingenia Communities Group ((INA)), Imdex ((IMD)), Data#3 ((DTL)), Stockland ((SGP)), Adairs ((ADH)), Vulcan Steel ((VSL)), and Ramsay Health Care.

For Goldman Sachs, the ruling themes are equally margins and cost reductions, consumer resilience and also companies buying growth through M&A.

Positive candidates identified include a2 Milk ((A2M)), Bendigo and Adelaide Bank, Breville Group ((BRG)), Life 360 ((360)), Telstra ((TLS)), Qantas Airways ((QAN)) and QBE Insurance ((QBE)).

Goldman Sachs has selected two candidates for a potential nasty negative: Reece and WiseTech Global.

Citi has picked Goodman Group, Smartgroup Corp ((SIQ)) and The Lottery Corp ((TLC)) for positive outcomes and Healius, Nanosonics and Netwealth Group ((NWL)) for a negative result. Ramsay Health Care was equally picked for more disappointment, as have been Ansell ((ANN)), Mineral Resources ((MIN)), NextDC, Siteminder ((SDR)), and Sonic Healthcare.

Over at JP Morgan, strategists Jason Steed and Dylan Adrian find comfort in reduced risks for a fall-of-the-cliff experience for corporate earnings in Australia. They argue tax cuts, rising real wages and the prospect of RBA rate cuts should bode well for domestic cyclicals. The strategists were previously lamenting the high valuations for segments such as banks and retailers, but that might rapidly become less of a concern.

Commodities will prove the major drag on earnings, JP Morgan predicts, with bank earnings set for another negative year. Only one company has been selected for a clear positive surprise: Woodside Energy ((WDS)).

JP Morgan’s basket for negative risk only has four names in it: Sims ((SGM)), South32 ((S32)), Ramsay Health Care, and Region Group ((RGN)).

Ord Minnett suggests healthcare could well become one of the star performers this month, also drawing confidence from ResMed’s strong opening act. This broker is less sanguine about general dynamics locally and thus has steered its radar towards foreign earners and pricing power domestically.

The insurance sector fits in the latter category. Companies including BlueScope Steel ((BSL)), Reliance Worldwide and James Hardie ((JHX)) have significant operations in the US and elsewhere.

For positive surprises, Ord Minnett is looking towards AGL Energy, AMP ((AMP)), Bluebet Holdings ((BBT)), GQG Partners ((GQG)), Guzman Y Gomez ((GYG)), Karoon Gas ((KAR)), and Zip Co ((ZIP)), among others.

Have been nominated for potential disappointment: ASX ((ASX)), Computershare ((CPU)), Corporate Travel Management ((CTD)), JB Hi-Fi, Healius, Nick Scali ((NCK)), and REA Group ((REA)).

The August reporting season has started in a relatively positive manner, but we’re talking low numbers. The FNArena Monitor currently reviews six companies of which three have delivered a positive surprise and only two missed in relatively benign fashion. Equally noteworthy: only two consensus price targets have not risen post result release; both are commodity producers Champion Iron ((CIA)) and Rio Tinto ((RIO)).

August Results: Early Beginnings

Share price movements are not the most reliable indicator thus far in July and August.

Contrary to what investors might assume, the Q2 corporate earnings season in the US is not a big failure.

Share price weakness over there is more plausibly explained through Gen.Ai scepticism and macro-inspired investor angst. Forced selling because hedge funds and others got burned through the yen carry trade hasn’t helped either.

In flagrant contrast with weak sentiment in the first two weeks of August, believe it or not, corporate performances in the US have mostly surprised to the upside, including trading updates and forward-guidances delivered. On data crunching undertaken by S&P Global Market Intelligence, Q2 EPS growth for the S&P500 has improved to 12.03% from 8.17% over the past four weeks.

That’s one big jump in defiance of widespread concerns about too high valuations carried by too high expectations.

US financials have thus far led the positive surprise, as well as consumer discretionary companies. The big disappointment is the energy sector. S&P Global’s consensus snapshot as per August 9th is shown below.

In terms of general statistics, 77.9% of companies reported have beaten EPS estimates and 62.3% of companies reported have beaten Revenue estimates, with 53.9% beating both EPS and Revenue.

Note how the percentage of EPS beats remains higher than top line beats, with both percentages better than the prior Q1 season.

One thing that stands out is those companies beating expectations are not by definition rewarded for it.

To experienced market observers, this means macro drivers are currently dominating investor sentiment and short-term trends. Add ongoing investor angst about elevated asset prices and it’s probably fair to observe corporate earnings have been relegated to the back burner, unless they’re well off the mark in a negative sense.

Deteriorating economic indicators might have re-opened the public debate about a recession or not for the US economy later this year, analysts at RBC Capital have spotted no confirmation in transcripts from corporate conference calls with investors these past number of weeks.

Rather, they say, most commentary seems to confirm the US economy is slowing, but so far without any dramatic consequences. Consumer spending appears less impacted at the higher end of society, which is not dissimilar from observed dynamics in Australia and elsewhere. General caution remains directed at the situation inside China. Inflation pressures are abating.

RBC Capital found references to uncertainty’ and risk’ have been much lower than in 2016 and 2022. As the Q2 reporting season winds down, RBC Capital analysts report “we remain struck by how solid the overall stats look”. Results and forecasts for technology companies have remained positive.

Results In Australia

In Australia, the season for corporate earnings updates is only gradually warming up. An acute shortage in experienced accountants is, apparently, responsible for most local companies releasing their financial numbers late in the month.

On Monday August the 12th, when I am writing these sentences, the FNArena Corporate Results Monitor still shows assessments of 24 updates only. In February, the total number of market updates accumulated to 387 throughout the season. This gives us a good insight into where we stand today, and what is yet to come over the three weeks ahead.

On FNArena’s assessment, 10 out of the first 24 companies managed to outperform expectations, which is a relatively high percentage (41.7%) but nine updates disappointed and that’s a high percentage too (37.5%). The first contrast with US equities is that outperformers locally still are being rewarded, if not on the day of release, then as soon as the macro allows it.

That observation stands for AMP Ltd ((AMP)), Car Group ((CAR)), JB Hi-Fi ((JBH)), Life360 ((360)), Light & Wonder ((LNW)), News Corp ((NWS)), Pinnacle Investment Management ((PIN)), REA Group ((REA)), ResMed ((RMD)), and Vista Group International ((VGL)).

The added observation is that six stocks out of that list are part of the higher-valued market segment that has been responsible for most of the local share market’s gain throughout the year past. In other words: a strong performance on above-average PE multiples is not by definition a deterrent for further upside (this is even more the case when the result forces analysts to upgrade forecasts and their valuation).

In line with observations made in past reporting seasons, often a strong share price performance (and above average PE) is merely a reflection of the market’s confidence this company is performing well, with more to follow. More often than not, on my observations, reporting season tends to confirm that confidence is warranted.

Not all the companies mentioned have as yet been fully assessed (the Monitor waits for analysts responses and they are not instant) but early indications are if companies surprise positively the average price target from the brokers monitored daily moves higher. The only exception to date has been Champion Iron ((CIA)), producer of iron ore.

Among the disappointments to date we find Audinate Group ((AD8)), Aurizon Holdings ((AZJ)), Mirvac Group ((MGR)), QBE Insurance ((QBE)), A-REITs Centuria Industrial REIT ((CIP)) and Charter Hall Long WALE REIT ((CLW)), and Rio Tinto ((RIO)). The latter reported only a small miss in the bigger scheme of things, its share price more a reflection of China troubles and US economic uncertainty.

But what this list shows is that hiding in underperforming, cheaper-priced laggards does not by definition equal a lower-risk strategy. A-REITs have been trading at sizable valuation discounts for the best part of three years now but analysts keep warning the sector is still subjected to falling asset valuations, higher operational costs, too much debt, and a lack of growth and positive catalysts.

Two early disappointments from the two REITs releasing market updates might be enough evidence already analysts’ caution is simply warranted.

Might the same observation prove as equally apposite following more disappointment from the likes of Aurizon Holdings and Mirvac Group? Shares in the former are trading near an eight year low while Mirvac shares are at a similar price level as during the peak of the covid sell-off in 2020 but there has been no short-term respite for long-suffering shareholders.

The strong and resilient versus the weak and vulnerable. Whereas most commentators elsewhere only look at the share market in terms of low(er) and high(er) share price valuations, my experience shows result seasons tend to reveal which businesses are strong and resilient and which ones are of lower quality and much more fragile when confronted with macro-economic challenges.

As shown by the relatively high number of earnings misses’ to date, those challenges remain tangible and large. QBE Insurance never quite manages to update without disappointment lurking somewhere, but at this point positive momentum for the insurance cycle dominates the outlook. AMP, for the first time in a long while, has most analysts adopting a more supportive view as the business no longer operates in freefall.

The first shock of the season has come early in the month with young and upcoming conqueror of the global sound industry, Audinate Group, surprising with lower sales and lower profits for the year ahead. All kudos to Macquarie who’d issued a warning before Audinate pre-indicated its FY24 numbers and FY25 guidance.

The irony resides with Morningstar whose technology analyst doesn’t like much listed on the ASX, certainly not the likes of Xero ((XRO)) or TechnologyOne ((TNE)), but then in particular developed a liking for Audinate Group (target of $23 in May).

Equally telling, those same analysts at Macquarie upgraded back to Outperform once the news was out and Audinate shares had received a good old shellacking from traders and dismayed investors.

How best to interpret what has happened? Having given this plenty of thought, I’ve come to the conclusion Audinate’s disappointment is simply the risk that comes attached to your typical small cap company.

Easily forgotten, but this is still only a business that sells less than $100m a year in products and services. Any set back in the order of -$10m has an outsized impact and that’s exactly what has happened.

This does by no means imply there are no further risks, and we still have to wait and see how management at the firm deals with ongoing growth pains and operational challenges.

By all accounts, and by most assessments made, Audinate should still have the capacity to develop the global industry standard for digital sound networking. However, similar as with experiences elsewhere (think lithium, cannabis, et cetera) not all megatrends are equally as strong and company size matters.

For more on the company, FNArena published the following on Monday: https://fnarena.com/index.php/2024/08/12/first-shock-of-the-season-whats-next-audinate/

August Paints A Bifurcated Picture

On balance, there’s plenty to like from the early batch of local results. But there’s a lot more to come. Too early to draw firm conclusions as yet.

As per always, investors tend to experience reporting season through their own portfolio holdings.

Miss out on the few sharp punishments and own a number of positive surprises and we might feel chuffed about past choices and our predilection for selecting winners.

Own a few bombs and the game looks rigged against the small investor, with no surprise big enough to lighten the mood.

The share market can be a treacherous place, in particular during reporting season when one cannot be too certain in advance that whatever our companies share with the outside world will be liked and positively received.

And that’s simply the financial performance over the six months or quarter past. What about management providing guidance on what is likely ahead?

Corporate results season in Australia is a slowly ramping up affair, and this means, broadly speaking and as has become the local standard, we still aint seen nothing just yet.

Today, on the 19th of August, the FNArena Corporate Results Monitor still only has reviewed 70 results.

That number will be closer to 400 in less than two weeks, so a lot can and will undoubtedly change as the numbers accumulate quickly from here onwards.

But we’ve had Rio Tinto ((RIO)), Goodman Group ((GMG)), CommBank ((CBA)) and CSL ((CSL)), ResMed ((RMD)) and Cochlear ((COH)), plus a whole series of smaller cap names and quarterly updates from the other Big Banks, so maybe looking at the early trends and observations might not be such a bad idea.

The first observation to highlight is the almost equal divide of those 70 reports over beats (23), meets (23) and misses (24). Before the season started, I had predicted notable polarisation because of ongoing inflation and other challenges, on the back of deteriorating economic momentum locally and globally, but this is almost a picture too perfect.

The FNArena Monitor combines financial outcome with forward guidance, if provided, and underlying those numbers is the fact many companies are able to meet analysts’ forecasts for the past six months. It’s the period ahead that is often the problem.

The dilemma investors are confronted with is whether management teams are too cautious when they look ahead?

Invariably, the share price receives a genuine shellacking as performance and guidance are measured against what analysts have embedded in their modeling. This is where things might get tricky because selling your shares into the instant punishment might not be the best decision to make.

I note, for example, CSL ((CSL)) shares were trading above $308 on August the 13th when FY24 was released with guidance that was lower than what was expected. The shares were punished for it, but today the share price is trading back above $308. And what to make of Audinate Group ((AD8)) first releasing a downbeat outlook for FY25 but then releasing a slightly better-than-flagged financial report which sees its shares rally by 20% on the day?

I mention both because both are owned by the FNArena/Vested Equities All-Weather Model Portfolio and I have been reminded by another investor recently that often the smartest investment decision to make is to do absolutely nothing. Hold that thought.

Two key differences with the recent quarterly reporting season in the US are that Australian companies are equally meeting or beating forecasts, but not because costs are falling. In Australia, the story behind FY24 results thus far is more about lower taxes and lower interest costs.

Inflation through input materials and staff remains a problem and this is also where most disappointments stem from. The other key difference is forecasts post corporate releases in the US have trended upwards; in Australia the net balance is for further decline. Business leaders Down Under are simply not equally as confident when looking ahead.

How much of this gap relates to the differences in messaging from the Federal Reserve and the RBA?

On Macquarie’s number crunching, analysts are downgrading twice as many times as they are upgrading forecasts.

The one stand-out reporter from the first two weeks is contractor NRW Holdings ((NWH)). Analysts had been optimistic in the lead-up to the FY24 release, and the company truly delivered with higher revenues, better margins and the promise of more contracts coming.

As is usually the case under such circumstances, forecasts and valuations have made a leap upwards, as can be seen from the notable jump in price targets, and the share price has responded accordingly.

Other strong performers include multiple companies that have enjoyed strong performances for a long while, including Life360 ((36)), Car Group ((CAR)), JB Hi-Fi ((JBH)), Light & Wonder ((LNW)), Pinnacle Investment Management ((PNI)), Pro Medicus ((PME)), REA Group ((REA)) and smaller caps Aspen Group ((APZ)), Temple & Webster ((TPW)), Vista International ((VGL)) and Viva Leisure ((VVA)).

In many cases, delivering a “strong performance” has become but the middle name of those companies, in particular the larger cap names with the public debate centred mostly around value’ and what price?

As per always, some of the long-time struggling companies are simply still struggling, including the ASX ((ASX)), Aurizon Holdings ((AZJ)), Beach Energy ((BPT)), Seek ((SEK)) and Seven West Media ((SWM)).

In some cases, or so it appears, financial performances and management insights are providing early optimism about a better-looking future.

Companies in the latter category include AGL Energy ((AGL)), Amcor ((AMC)), AMP Ltd ((AMP)), Amotiv ((AOV)), Challenger ((CGF)), maybe even Magellan Financial ((MFG)).

Thus far, medium sized and smaller cap companies are doing better than the large caps. If healthcare is making a comeback in 2024, it’s not happening with a Big Bang.

One sticky point in Australia is always: what about dividends for shareholders?

Here, the banks have surprised in a positive sense, with CommBank yet again showing one should never assume last year’s dividend cannot be raised, no matter what the circumstances. But most REITs have confirmed the tough challenges that are weighing on cash flows and distributions.

Analysts have spotted early signs of improvement, but every investor’s best friend remains careful stock selection, and patience.

While distributions to date seem to have disappointed, there have been multiple positive surprises, also because that’s what Australian boards do when profits encounter a set-back. See, for example, BlueScope Steel ((BSL)) and Suncorp Group ((SUN)) on Monday.

On my observation, your typical cyclical, outside of retailers, is very much prone to reveal its fragility this month. Apart from BlueScope Steel on Monday and Sims Group ((SGM)) earlier, this also includes Nufarm ((NUF)), Evolution Mining ((EVN)) and the earlier mentioned Beach Energy. Origin Energy’s ((ORG)) update equally fell well short of expectations.

One company that deserves a special mentioning is Telstra ((TLS)). A little over one month ago, sentiment quickly soured when management decided to abandon the telco’s automatic annual price increase for mobiles. Shareholders, rightfully or otherwise, might have worried about future dividends not keeping up with inflation.

Last week’s FY24 release has completely reversed that dynamic. Confidence is now strengthened about Telstra lifting its annual dividends by 1c each year, in multiple consecutive years ahead.

One cent doesn’t sound like much, but when the starting base is the 18c from FY24, this 1c increase is relatively something that in comparison remains out of reach for most REITs and other dividend payers, including the banks.

This is why Telstra is making a comeback as the most preferred dividend/income stock on the ASX for many.

My personal story is that Telstra is part of the specific dividend paying segment in the All-Weather Model Portfolio, but I too had become worried it was probably better to move onto greener pastures elsewhere. The wise decision I made was not to hurry and wait until the August result before deciding upon making any changes.

Similar as in the case of CSL, Telstra’s share price is now back to where it was before that announcement was made. And herein lays a lesson for all of us: sometimes the best decision truly is to not make any changes at all.

One disappointment and a weaker share price in the here and now does not automatically spell disappointment and a bad outcome longer term. It’s good to be reminded about these things, assuming we can trust our judgment and the companies we choose.

P.S. in case anyone wondered: 1c in addition for the next three years for Telstra’s 18c dividend translates into an increase of 5.56%, 5.26% and 5% respectively. The implied forward-looking dividend at today’s share price (ex-franking) is 4.8%.

August Trends Have Darkened

Reporting season is when investors receive a detailed insight into how companies are actually performing. Where is momentum? How strong is it exactly? And where are the weaker points?

But investing is all about the future and thus what is likely to follow next is arguably of much greater importance than what has been up until June 30th.

Consider, for example, that companies including Megaport ((MP1)) and BlueScope Steel ((BSL)) released financials that either met or bettered analysts estimates, but share prices have come under pressure because the outlook proved disappointing.

This is why FNArena thinks a simple statistic of meets/beats/misses on the basis of reported financials remains a flawed methodology.

Thus far this month, most companies meet or beat expectations, which is positive and vindicates the market’s positivism up until this point, but outlook statements and guidances provided have largely been softer-than-anticipated.

The latter is not so positive and has turned into a defining feature in recent days.

Last week, the FNArena Corporate Results Monitor showed a reasonable balance between meets, beats and misses, with a slight bias towards the latter.

On Monday in the final week, the pendulum is notably swinging towards many more disappointments.

In most cases, it’s all about a weaker outlook. Of the 189 assessments in the Monitor, 71 have been labeled as miss’ (37.6%) versus only 57 beats’ (30.2%) and 61 results arriving in line with forecasts (32.2%).

This negative balance is more pronounced for the ASX50, but it applies equally to the ASX200 and all corporate reporters combined.

Interestingly, the numbers have notably deteriorated on the back of predominantly smaller cap companies reporting, including Accent Group ((AX1)), ARN Media ((A1N)), Autosports Group ((ASG)), Big River Industries ((BRI)), Inghams Group ((ING)), and Jumbo Interactive ((JIN)).

Admittedly, these companies do not represent the same clout or investor interest as, say, CommBank ((CBA)), Rio Tinto ((RIO)), Goodman Group ((GMG)) or CSL ((CSL)), but then the local blue chips haven’t exactly presented a much rosier picture either.

What should concern is that FY24 estimates are gradually creeping higher, at least up until last Friday, but FY25 forecasts are moving in the wrong direction.

Not that long ago, forecasts were for a robust looking 5%-ish growth outlook without much contribution from resources. By now the average EPS forecast for the year ahead for the ASX200 is moving closer to the 3% mark.

It has elicited a rather dark comment from analysts at JP Morgan that the Australian share market, in the absence of a growth revival for resources, is at risk of becoming the growth laggard in comparison with international markets.

The irony is that Growth companies remain one of the few genuine stand-out segments this season yet again.

Analysts at JP Morgan and Macquarie have both acknowledged as much with the latter identifying WiseTech Global ((WTC)) for the best post-result return thus far. Founder Richard White’s life long achievement now comes with a market cap of nearly $40bn and an inclusion inside the ASX50, hence WiseTech’s positive surprise is challenging a few views and opinions here and there.

Try: tech stocks are grossly overvalued. Or what about: small caps will have all the momentum?

One of the insights I’ve gained throughout the week past is the rather sharp share price rally in WiseTech Global shares was not so much inspired by shorters covering their potential losses.

The FNArena Short Report, taking data from ASIC, shows short positions weren’t that high in the first place (only 1% of outstanding capital) but it will be interesting nevertheless to see whether that percentage has declined post release of FY24 financials.

Instead, some heavy buying from at least one local high-conviction fund manager has been occurring. Clearly, someone has been convinced this strong growth story has a lot further to go.

JP Morgan has nominated Brambles ((BXB)), Challenger ((CGF)) and WiseTech as stand-out positive performances. On the negative side, the broker has placed Aurizon Holdings ((AZJ)), Seek ((SEK)) and Megaport.

At Macquarie, analysts put Breville Group ((BRG)) and Cleanaway Waste Management ((CWY)) among the growth companies that are standing out this month, and make the segment look good overall. Key positive surprises, suggest Macquarie, have come from Charter Hall ((CHC)),  Brambles and WiseTech.

For big disappointments, Macquarie points at BlueScope Steel, Megaport, and a2 Milk Co ((A2M)).

Analysts at Ord Minnett make two observations:

-freight costs have been more of a problem for exports into the UK and Europe, less for imports into Australia, and most companies are able to manage it
-the consumer is weak, but some retailers are able to execute well, with weakness also prevalent for car dealers, quick service restaurants and gaming

JP Morgan has identified the following three key themes:

1. Labour markets are noticeably easing
2. Housing remains a key challenge
3. Inflation is moderating

Over in the USA, where the quarterly reporting season is nearing its end, with the all-important Nvidia yet to report later this week, analysts at Morgan Stanley draw the following three key conclusions:

-Consumer weakness is becoming a theme. Not as a fall-off-the-cliff threat, but spending is weakening nevertheless
-Travel has begun to falter, though signals across industries are varied and mixed
-Consumers remain prepared to pay a premium for products and services that offer a greater degree of convenience

Probably the most important observation is the number of US companies for which analysts are turning more positive is shrinking yet again. In other words: yes, growth forecasts in the US are still trending upwards, but the number of companies with positive momentum is getting smaller this Q2 reporting season.

It’s good to keep in mind while the local reporting season will end by the end of this week, the Monitor still only comprises of 189 results. A whole lot more is yet to be unleashed in the coming days.

FNArena is updating on a daily basis: https://fnarena.com/index.php/reporting_season/

Among the changes in stock preferences that have occurred is Wilsons including James Hardie ((JHX)) in its Focus Portfolio (in explicit preparation of Fed rate cuts that should stimulate building and renovating in the USA).

Netwealth Group ((NWL)) has been removed after a stellar share price performance that has Wilsons suggesting there’s limited potential for further upside, in the short-to-medium term that is.

Wilsons equally reconfirmed its positive view on CSL ((CSL)) has remained intact, despite Vifor yet again disappointing in CSL’s FY24 release, as well as its ongoing negative view on CommBank ((CBA)). Nobody denies the banks are performing well, relatively, and CommBank is the supremo in the local sector, but those valuations

An observation from Macquarie: Banks in Australia are trading at circa 3 standard deviations away from their average valuation since 2001, making them the most expensive sector on the ASX.

Morgan Stanley’s Australia Leading Ideas Equity Portfolio has now included Audinate Group ((AD8)) shares in support of this broker’s view this month’s disappointment (through a subdued FY25 outlook) is simply a short-term set-back. Nothing more, nothing less.

These dedicated portfolios tend to outperform the local index over time (based on calculations published by these brokers) and for this reason I thought it might be worthwhile to provide an insight into what’s currently included.

Communication Services
-Telstra ((TLS))
-Car Group ((CAR))

Consumer Discretionary
-Wesfarmers ((WES))
-Domino’s Pizza ((DMP))

Consumer Staples
-Treasury Wine Estates ((TWE))

Energy
-Paladin Energy ((PDN))
-Santos ((STO))

Financials
-CommBank
-National Australia Bank ((NAB))
-Westpac ((WBC))
-ANZ Bank ((ANZ))
-Macquarie Group ((MQG))
-Suncorp Group ((SUN))
-QBE Insurance ((QBE))

Healthcare
-CSL ((CSL))
-ResMed ((RMD))

Materials
-BHP Group ((BHP))
-Rio Tinto ((RIO))
-Orica ((ORI))
-James Hardie ((JHX))
-South32 ((S32))

Real Estate
-Goodman Group ((GMG))
-Scentre Group ((SCG))

Utilities
-AGL Energy ((AGL))
-Origin Energy ((ORG))

Small Caps (ex-100)
-Deterra Royalties ((DRR))
-Corporate Travel Management ((CTD))
-Hansen Technologies ((HSN))
-Premier Investments ((PMV))
-Propel Funeral Partners ((PFP))
-Life360 ((360))
-Audinate Group ((AD8))

In comparison with the prior 11x August results seasons that have been covered by the FNArena Monitor, some 30% of companies outperforming forecasts is by no means a bad result, that’s pretty much in line with the decade-long average, but 37.6% in disappointments -if sustained- would be by far the worst outcome since 2013.

What makes the current trend so worrisome is that history suggests the tail end of reporting seasons in Australia brings out more misses and bad news performances. And with share prices on average holding up or rising further, JP Morgan highlights the ASX is currently leading the world in terms of multiples expansion (earnings estimates are falling).

The only sector locally that has seen its multiples contract is the Energy sector.

It would not surprise that if the US market stumbles at some point, the Australian share market might underperform during the process. It’s not simply due to the difference in central bank pivots, surely?

August Results Fail To Inspire

Investors are trained to be optimistic and hopeful but if the August reporting season proved one thing it is that hope is not an ideal strategy during times when economies are slowing and household budgets persistently under duress.

On balance, August results proved a rather uninspiring experience that mostly triggered a lukewarm reception from investors. The answer why’ was yet again confirmed by this week’s update on GDP growth locally that, at 0.2% quarter-on-quarter and 1% annualised, printed the lowest outcome for any quarter in Australia since the early 1990s, outside of the covid downturn.

Equally important: consumer spending detracted -0.2% from economic growth in the June quarter (the worst number post-GFC ex-covid) and it was spending by the government, foreign students and visitors that kept the pace above zero.

Economists at Oxford Economics responded as follows:

“Net exports and public demand were the major contributors to growth in the quarter.

“The economy is lacking a clear engine of growth. Tight policy settings have successfully reined in demand, but inflationary pressures are yet to be completely tamed. Income tax cuts and consumer subsidies will aid momentum in the second half of the year. But any improvement in activity will be unspectacular.”

The follow-up from peers at NAB: “We continue to assess that soft growth through H1 will be the trough in growth and look for improving but still below trend growth in H2 contingent on the response to tax cuts and ongoing easing in inflation for household consumption. Overall, we continue to see growth of around 1% this year.”

Corporate results in August have very much reflected that reality. Miners, energy companies and other cyclicals proved the biggest disappointments. Small caps delivered many hits and misses, but more misses as cost increases and the need for more investments put investors’ patience to test.

Conclusion from Morgan Stanley: resources remain trapped in value.

Equally important: the weaker priced laggards failed to live up to hope and expectations, while highly-priced growth champions refused to falter. The latter is best illustrated by the fact WiseTech Global ((WTC)) crowned itself to most valuable contributor for the ASX200 throughout the month, after the banks.

WiseTech is nowadays part of the ASX50 but its index weight hardly exceeds 0.50%, which just shows how tepid most stocks have performed during the month. WiseTech shares did put in a 25% rally on improved margins, new customers and new products and refused to give it back, outside of a small pullback on nervous profit taking.

As is local custom, EPS forecasts weakened throughout the season, as expected, but the truly sobering observation is forecasts for FY25 have shrunk too. In Macquarie’s case, a projected 10% increase has reduced to virtually zero. Resources are mainly to blame, but they are not the only ones responsible.

Macquarie’s response: “FY25 earnings recovery aaaand it’s gone”.

Market consensus forecasts are not quite as pessimistic, with forecast FY24 EPS now at negative -4.3% and the FY25 forecast at a positive 4%. The long term average in Australia is circa 5%. It looks like the economic prediction of Oxford and stockbroking analysts are connected at the hip: “any improvement in activity will be unspectacular”.

As also flagged by analysts at JP Morgan during the month: falling forecasts with a share market near an all-time record high makes for an expensive valuation. Too expensive, probably, to be maintained.

Morgan Stanley did the numbers, also taking into account where markets are in the cycle as well as the level of bond yields, and concluded trading on an average forward-looking PE ratio of 17.5x the Australian share market has seldom looked as “expensive” as at the end of August.

On the broker’s assessment, forward multiples for every single sector except Energy at the end of last week were at a twelve months’ high.

No surprise, some technical analysts are toying with the idea the ASX200 might have put in a so-called double top in August, suggesting more weakness ahead but also that we won’t see the index returning to these peak levels anytime soon.

The FNArena Corporate Results Monitor is a reflection of the above. Comprising of more than 350 companies (more updates are in progress) covered by at least one of eight leading stockbrokers, this Monitor is likely the most comprehensive insight available in Australia with a history dating back to 2013.

Combining financial results with outlook statements and analysts’ receptions of both, the Monitor has established some 36% of all financial updates in August have disappointed, contributing to forecast downgrades, while 28% managed to beat’.

Placed in an historical context, this places August 2024 at the top for misses’ and near the bottom for beats’. It has been rather disappointing, Barrenjoey has concluded. Looking at those numbers, it’s difficult to disagree. Observe also how, after updating 350 companies, the average price target in the FNArena Monitor has hardly moved.

Elevated Prices On Below-Trend Earnings

Having said so, investing is forward-looking and UBS strategist Richard Schellbach has seen “tentative signs that activity levels have already bottomed, and that the prospect of rate cuts over the next 12 months will provide a tailwind for further market gains.”

Schellbach sees the 4% EPS growth that is currently projected as “achievable” but he also sees a major role for the RBA -when will that first cut arrive?- while the key risk for Australia remains further deteriorating economic momentum in China. Can the local economy remain detached from it?

Analysts Andrew Tang and Tom Sartor at stockbroker Morgans equally prefer a more optimistic tone, calling the August results “respectable”, with concerns emerging about elevated valuations versus below-trend earnings.

The Morgans analysts do concede economic momentum might well slow down further and investors should be prepared for more downbeat outlook statements at the upcoming AGMs. Offsetting this concern is the fact central banks are setting the tone for interest rate cuts and these should provide support for equities.

History suggests lower interest rates do support risk assets such as equities for as long as there’s no economic recession on the horizon.

In line with my own observations, Morgans observes share price performances are diverging strongly between winners and laggards which is seen as a signal investors need to be more active and selective in their choices. “Earnings quality, market positioning and balance sheet strength will play an important role in distinguishing companies from their peers”, Morgans concludes.

Strategists elsewhere have equally called for Quality’ over cheap stocks’. As yet again proven throughout August, more disappointments stem from lower-quality, smaller-sized, vulnerable business models. In contrast, stocks including Life360 ((360)), WiseTech Global, Hub24 ((HUB)), JB Hi-Fi ((JBH)) and Breville Group ((BRG)) were all considered fully priced, at the very least, before outperforming yet again during reporting season.

More than 40% of company reports in August triggered a share price response in excess of 5% on the day of release, Morgan Stanley reports, indicating the season has been volatile, even without macro impacts such as the yen carry trade turmoil. The bias has been to the downside as misses’ were punished more severely than upgrades have been rewarded.

Themes From The Season

Barrenjoey has identifed eight themes emerging from the August season (below are those themes formulated in my words):

1.) A relative resilient Australian consumer, but can and will it last?
2.) A structural housing shortage in Australia isn’t by default positive for construction activity in the short-to-medium term
3.) China: how weak and for how long?
4.) Inflation remains an issue, though less so than in the recent past
5.) High rates, and their burden, still feature for many companies
6.) Looks like re-stocking will be for next calendar year
7.) Companies will increase dividends and payouts for shareholders, whenever they can
8.) Investors showing limited patience for corporate turnarounds

With regards to point number 7, larger-than-forecast dividends, and bonus payouts on top in numerous cases, have been one of the stand-out positives this season. Some analysts (Macquarie, Morgans) consider this a positive signal showing corporate confidence in the earnings trajectory ahead.

While this is not necessarily untrue, the corporate culture in Australia commands that shareholders will be offered a sweetener in case of operational disappointment. Investors do not need to look any further than the local banks which yet again surprised through higher dividends in August.

I’d therefore conclude the fact the August season has been an overall disappointing experience is confirmed by the fact dividends, and special payouts, are the stand-out feature from the month.

Data-crunching by Morgan Stanley reveals most upside surprises have occurred through dividends, less so through EPS and even less through revenues.

Analysts at Macquarie make the observation general statements and sentiment were noticeably less optimistic than in February, indicating conditions generally are worsening. This observation is backed up by our own statistics: in February the FNArena Monitor registered 33% beats’ versus 28% misses’.

These numbers were by no means among the favourable ones over the past decade, but they do look a lot better than the outcome from August. Twelve months ago, beats’ and misses’ almost balanced each other out on 29% and 28% respectively, leaving nearly half of all reports to simply meet forecasts.

Let’s Talk Stock Specifics

In terms of individual stocks, Barrenjoey has identified both Brambles ((BXB)) and ResMed ((RMD)) as two outperformers in August that are still worth pursuing. Both share prices have proved remarkably resilient, including through the general turmoil that has yet again showed up in early September.

Barrenjoey also still likes Insurance Australia Group ((IAG)) and Medibank Private ((MPL)) among insurers and Qantas Airways ((QAN)) to play the uneven and polarised consumer spending theme. It is considered too early still for re-stocking plays such as BlueScope Steel ((BSL)) and Reliance Worldwide ((RWC)).

Morgans has highlighted BHP Group ((BHP)), ResMed, Flight Centre ((FLT)), NextDC ((NXT)), Reliance Worldwide and The Lottery Corp ((TLC)) as part of its Best Buy ideas. The latter selection consists of 30 ideas, also including CSL ((CSL)), GQG Partners ((GQG)), WH Soul Pattinson ((SOL)), Treasury Wine Estates ((TWE)) and Rio Tinto ((RIO)).

The full list of 30 Best Buy ideas will be included in next week’s Rudi’s View update on Thursday morning.

Macquarie highlights only 5% of stocks beat on EPS and also enjoyed FY25 upgrades, including Block ((SQ2)), JB Hi-Fi, Telstra ((TLS)) and Lynas Rare Earths ((LYC)). A higher share (8%) of small caps combined beats plus upgrades, including Hub24 ((HUB)), Temple & Webster ((TPW)), Regis Healthcare ((REG)), Service Stream ((SSM)), Perseus Mining ((PRU)) and Sandfire Resources ((SFR)).

Model Portfolio managers at Macquarie worry that the impact from slowing economies might outweigh the benefits from central banks cutting interest rates and have thus added Transurban ((TCL)), James Hardie ((JHX)) and Megaport ((MP1)) while removing Computershare ((CPU)), South32 ((S32)) and Whitehaven Coal ((WHC)).

Based on in-house research into similar conditions going back to the 1980s, Macquarie believes there’s a good chance Technology and gold will outperform in the months ahead. The portfolio retains an Underweight allocation to the banks.

Depending on what happens with general conditions throughout the months ahead -will they favour cyclicals or not?- further re-rating potential for the Technology sector might be limited, argues Morgan Stanley. With this in mind, backing continued execution is critical, the broker argues. Favourite exposures are WiseTech Global, Xero ((XRO)), Rea Group ((REA)), and Car Group ((CAR)).

The latest update for Goldman Sachs’ APAC Conviction List shows Australia remains represented through Qantas Airways, Xero, and Lynas Rare Earths. Woodside Energy ((WDS)) remains included in RBC Capital’s Global Energy Best Ideas. That same Woodside has been downgraded by Citi to Sell.

Jarden sees opportunity in Harvey Norman ((HVN)) and Accent Group ((AX1)), but also believes the market is too downbeat on travel stocks. Favoured exposures are Webjet ((WEB)), Flight Centre and Helloworld Travel ((HLO)).

One sector that is yet again attraction attention for a possible re-rating are A-REITs. Morgan Stanley notes the sector has woefully underperformed international peers in July and August. Sector analysts at JP Morgan are forecasting no more than 1% earnings growth for the sector ex-Goodman Group.

JP Morgan’s preferred large cap A-REITs are Scentre Group ((SCG)), GPT Group, Dexus ((DXS)) and Charter Hall ((CHC)).

JP Morgan’s Emerging Companies research team puts forward Superloop ((SLC)) as most favoured idea, while ARB Corp ((ARB)) is least-preferred due to concerns about margin pressure.

Post-August Best Ideas

In terms of where to put fresh money, I cannot help but think this year’s weakness in uranium companies equates to short-term traders throwing out the baby with the bathwater. Shares in Paladin Energy ((PDN)), probably the least-risky option locally, have halved since May.

Yes, I do understand the reluctance in trying to catch a falling knife. Besides, I am by no means that type of investor. Cue my proprietary research into All-Weathers, which also defines the mandate that rests with the earlier mentioned Model Portfolio.

From that portfolio, the one idea that springs to mind is Dicker Data ((DDR)), distributor of all things technical with a firm focus on smaller sized businesses across Australia. Dicker Data’s FY24 performance disappointed in August, because of too high operational costs, but underlying lays solid growth.

I regard Dicker Data as part of the Gen.Ai exposure inside the Model Portfolio, as the impact from the next tech revolution won’t stay limited to data centres and related beneficiaries; at some point, laptops, PCs and other devices will be sold with Gen.Ai embedded, and that will reinvigorate momentum for companies also including Officeworks ((WES)), JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Data#3 ((DTL)).

One expression from legendary investor Peter Lynch comes to my mind regularly in 2024: you have to know what you own, and why you own it. Selling shares today that should be trading a lot higher over the next 12-14 months, but might be cheaper over the next month or so, is not what suits my style of investing.

One other idea was put forward by Morgan Stanley this morning (on Monday): Accent Group ((AX1)). It’s the broker’s number one small cap idea that has come out of the August results season.

Macquarie has selected 16 Quality small- to mid-cap companies now considered best ideas post robust performances in August:

-AUB Group ((AUB))
-Breville Group ((BRG))
-Flight Centre ((FLT))
-Fisher & Paykel Healthcare ((FPH))
-GQG Partners ((GQG))
-Integral Diagnostics ((IDX))
-JB Hi-Fi
-Lovisa Holdings ((LOV))
-Nick Scali ((NCK))
-Monash IVF ((MVF))
-Propel Funeral Partners ((PFP))
-Pinnacle Investment Management ((PNI))
-REA Group ((REA))
-Reliance Worldwide ((RWC))
-TechnologyOne ((TNE))
-Seven Group Holdings ((SVW))

Key Picks, Best Buys & Conviction Calls

Global economic growth is slowing and, if forward-looking indicators can be relied upon, momentum remains poised for further weakness, possibly into the final quarter of 2024 and beyond.

How is an investor best to respond?

One strategy update that attracted a lot of attention this week stems from UBS advocating Australian banks over resources stocks. Are bank shares expensive? Yes, they are. Are resources share prices cheap’? Yes, they have underperformed a lot this year. But UBS clearly takes the view economic growth is not ready yet to bounce back and thus more weakness may well be in store for BHP Group ((BHP)) and its peers.

The strategy modeling at Citi, oriented more globally than UBS’s ASX-centric view, draws a different conclusion which may also be guided by the fact Citi’s in-house conviction remains for an economic recession to announce itself later this year in the land of Harris versus Trump.

Reduce your exposure to risk assets is conclusion number one from the Citi modeling, which translates into reduced exposure to equities and to credit. Underneath those recommendations, however, things become a lot less straightforward, or so it seems. For starters, Citi’s model advocates portfolios should move Overweight commodities, but not energy, through oversized positions in precious metals and base metals.

In terms of equities, US and UK markets are preferred, while Citi shuns Emerging Markets. There’s no specific mentioning of Australia, but one can probably safely assume the ASX sits in the same basket as Hong Kong, Singapore, et cetera.

In case that economic recession does arrive, alongside rate cuts from central banks, an Overweight exposure to government bonds seems but appropriate, Citi’s modeling shows. It goes without saying, share markets are priced for a soft landing, and will receive some kind of a shock if/when Citi’s forecast for economic recession proves correct.

As I wrote myself earlier this week: plenty of expert voices around that believe Citi’s prediction will not materialise.

As it happens, the FNArena inbox received a missive from Ninety One this morning stating the above mentioned risk has already well and truly been priced in for Emerging Markets assets and with the Federal Reserve about to embark on loosening US monetary policy, the USD should start weakening and this, historically, tends to bode well for Emerging Market equities.

No doubt, Citi would counter-argue economic recession is likely to strengthen the greenback (reduced risk appetite favours safe havens) so maybe the best conclusion to draw is this debate remains unresolved still, just like the US presidential election.

Ninety One also argues Emerging Markets enjoy structural tailwinds, robust earnings growth, compelling valuations and the USD is currently trading near a twenty-year high.

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Strategists at Morgan Stanley see too many contradictions in today’s markets, and this almost guarantees a big pick-up in volatility as sometime, somehow those contradictions need to be brought back in line.

The current set-up is US bond markets are positioned for many more rate cuts than is feasible under a soft landing scenario, i.e. the bond market agrees with Citi there is likely an economic recession on the horizon.

US equities, on the other hand, are carried by analysts forecasting 13% profit growth over the next six quarters; twice the normal rate.

Economic growth is slowing, Morgan Stanley points out, let’s have no doubt about that, and the US labour market is cooling. Assuming the bond market is too cautious and slow economic growth remains the most likely outcome, not negative economic growth, this still leaves the strategists with the incling that current growth forecasts seem too high.

Their advice: balance portfolios between defensives and cyclicals, growth and value, large caps and small caps, and apply maximum diversification. Share market momentum is anticipated to move away from the Mag7.

Taking a global view, Morgan Stanley’s Best Ideas for portfolios are US financials, energy, healthcare, Japan, real assets and infrastructure investments. The strategists are ultra-cautious on small caps with rates still high, economic momentum weakening and US consumers being squeezed.

Peers at UBS highlight the conundrum as follows: when the bond yield curve dis-inverts this benefits small cap companies as they mostly bear floating debt, but then worsening economic conditions present themselves as a serious headwind.

Morgan Stanley sees the S&P500 range-trading between 4700-6100 with a June-2025 target of 5400. Similar as at Citi, fixed income is the most preferred exposure. Goldman Sachs is more optimistic, targeting 5400 for the S&P500 in three months, 5600 in six months and 5700 this time next year.

For Australia, Morgan Stanley’s forecast is for slight improvement in economic momentum, but still below-trend, and nothing spectacular. Morgan Stanley’s mid-2025 target for the ASX200 is set at 8100, with a bull case scenario of 8701 and a bear case alternative of 5631.

Prime problem for the local bourse is hardly a pulse in terms of earnings growth while the forward-multiple is 17.3x, well above the long term average of 14.7x and the 10-year average of 15.9x. Equity valuations are also deemed “expensive” relative to the historical relationship with bond yields.

The average dividend yield for the ASX200 is circa 3.6% versus the historical average of 4.5% since 2000. It is Morgan Stanley’s view local share prices have disconnected from underlying forward earnings.

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In line with the observations above, strategists at Macquarie note bond markets and commodities are both signalling much worse conditions ahead than is currently assumed by equities. Macquarie is not quite sure whether economic recession is unavoidable, pointing out the signals available remain still quite diverse and leave plenty of room for debate on the matter.

Macquarie’s model portfolio remains Overweight equities with a preference for Quality’ and US markets. Australia is expected to lag.

Another preference is for non-correlated assets that can hedge against downside risks, such as infrastructure  and hedge funds.

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For those investors allocating beyond ASX-listed equities, Morgan Stanley has released its short list of Vintage Values 2025; mid- to large cap US listed companies that can be held for 12 months for superior investment return:

Amazon.com
Apple
Bank of America
Boston Scientific
Constellation Energy
Eli Lilly
GE Vernova
General Dynamics
Lineage
Live Nation Entertainment
M&T Bank Corp
Nvidia
ServiceNow
Visa
Walmart

In a world wherein just about everyone’s average holding period is constantly in decline (or so surveys show us) I find it quite refreshing to see a researched attempt to select 15 companies that can be bought and not looked at for the next year (if not longer).

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Coming out of the August results season, Citi’s team of REITs analysts highlights the signs are there for many AREITs to be experiencing a peak in finance costs. This signals a turn-around might be approaching and indeed a case can be made this is already starting to show up in share prices.

Citi remains of the view some segments are better positioned than others, and the preference lays with sub-sectors that enjoy favourable supply and demand conditions, such as Industrial and Alternatives (land lease and self-storage), while any recovery should benefit residential and fund managers in the sector.

Highlighted Top Picks include Scentre Group ((SCG)), Stockland ((SGP)), Goodman Group ((GMG)), National Storage ((NSR)) and Ingenia Communities Group ((INA)).

While conditions for Office markets are improving, Citi still won’t go there. (Play the theme through diversified REITs, say the analysts).

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As has become tradition, Morgan Stanley analysts have communicated their Key Picks among ASX-listed small and mid-cap companies post the August results season. Have thus far been chosen:

-Accent Group ((AX1))
-Jumbo Interactive ((JIN))
-ARB Corp ((ARB))
-SiteMinder ((SDR))

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Stockbroker Morgans saw investors warming towards a better outlook for consumer spending ahead in August, with companies highlighting better conditions towards the final days of FY24, but financial results undershot against the broker’s forecasts nevertheless.

Morgans’ Key Picks post August are Beacon Lighting ((BLX)), Super Retail Group ((SUL)) and Universal Store ((UNI)).

Peers at Jarden continue to favour companies with long share runways, expansion plans and improving return on invested capital (ROIC). Companies that fit the mould include Flight Centre ((FLT)), Webjet ((WEB)), Temple & Webster ((TPW)), Universal Store, Woolworths Group ((WOW)), Treasury Wine Estates ((TWE)) and Domino’s Pizza ((DMP)).

Jarden remains more cautious on more mature businesses facing increased competition.

Morgan Stanley retains a preference for staples as the valuation gap with discretionary retailers has widened too far. Morgan Stanley has Overweight ratings for Woolworths Group and Endeavour Group ((EDV) and Underweight ratings for Wesfarmers ((WES)), JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Super Retail.

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Citi’s two favourite exposures to the local healthcare sector are now Australian Clinical Labs ((ACL)) and CSL ((CSL)).

The five least liked exposures are (from the bottom up) Pro Medicus ((PRO)), Nanosonics ((NAN)), Cochlear ((COH)), Fisher & Paykel Healthcare ((FPH)) and Healius ((HLS)).

Macquarie’s local healthcare favourites are CSL, ResMed ((RMD)), Regis Healthcare ((REG)) and Intregral Diagnostics ((IDX)). Least preferred are Cochlear and Sonic Healthcare ((SHL)).

For online retailers, Citi’s favourite is Temple & Webster ((TPW)) with Kogan ((KGN)) Sell-rated and least preferred.

Defensives, Healthcare, Resources & Data Centres
 

Many years of experience with investing and analysing the share market teaches us one very important insight: whether the outlook involves a bear’ or bull’ market very much depends on specific definitions that may or may not be the all-important for one’s strategy and portfolio positioning.

Either way, Morgan Stanley’s wealth management division has been so kind in offering us their key themes for the next’ bull market:

Electrification and Real Infrastructure: grid build out, EV charging networks, data center cooling

Digitisation of services business: including hardware and software/service providers behind enterprise automation implementation of: AI, natural language processing, machine learning, optical scanning and facial recognition. Sectors that stand to benefit most include financials, health care, government, education, consumer services/call center heavy

De-globalisation: infrastructure and supply chain reconfiguration. Sectors: industrials, construction, materials, mining

De-carbonisation: energy both green and carbon, EV, batteries, minerals, mining, internet of things, smart highways

Defense/Cybersecurity, space, satellite surveillance

Biotech/Genomics

Demographics/Residential housing

Managing longevity/Debts and deficits

If anyone thinks Morgan Stanley might not have the most optimistic forecasts in mind for equities they’d be correct. In Australia, the house view is that share prices and underlying corporate earnings have disconnected, as also illustrated by expensively priced bank shares that simply won’t go down.

Over in the US, the house view is the bull case scenario has pretty much been priced-in for equities, suggesting investors should be looking at reducing their exposure to this year’s winners and turn more defensive.

Head of Nuveen Equities and Fixed Income, Chief Investment Officer, Saira Malik also believes decelerating economic momentum is likely to turn financial markets a lot more volatile and a lot tougher to navigate. Her solution is to turn to trustworthy, reliable dividend payers.

History suggests, according to Nuveen research, dividend growers are an effective diversifier from large cap growth stocks when times get tougher. The research suggests companies operating a robust business model offering an attractive yield and growing their dividends tend to be less volatile, which makes them a sound choice for a core portfolio allocation, Malik suggests.

Over at DNR Capital, the stockpickers’ intention is to stick with high-quality companies that might still be undervalued. Two such companies have been identified:

-James Hardie ((JHX))
-Treasury Wine Estates ((TWE)

Macquarie’s Model Portfolio recently added James Hardie shares.

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Additional surveys conducted are suggesting the Australian consumer is refusing to crack. This has convinced UBS strategist Richard Schellbach that share prices for consumer discretionary companies are too cautiously priced.

The UBS Model Portfolio has shifted to Overweight this sector, as well as towards more exposure to the telecom sector as those same consumers are indicating they expect to increase payments on phone bills.

UBS also reports respondents are warming to the idea of buying property, but still acknowledge that such a purchase will require a sale of any additional homes.

The team of global strategists led by Andrew Garthwaite retains its portfolio preference for defensives. This team’s view remains most cyclicals are still expensively priced, i.e. investors are too optimistic about what lays ahead. In terms of seasonality, Garthwaite & Co point out November is traditionally the time to start buying cyclicals, not in September.

Taking into account a whole range of factors, including investor crowding, valuations, earnings and share price momentum, it is UBS’s view the best defensives to buy/own globally are among food producers, beverages companies, utilities and healthcare equipment providers.

Among the companies mentioned are no ASX-listed names. The list includes the likes of E.On, Abbott Laboratories, Air Liquide, Microsoft and Heineken.

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Fresh from an overall underwhelming August reporting season, healthcare analysts at Jarden did see early signals of greenshoots emerging for the sector in Australia, although improvements were by no means universal.

Ramsay Health Care ((RHC)) in particular has been identified as one former outperformer that remains difficult to get excited about, still. Another prominent negative surprise was Cochlear’s ((COH)) outlook.

Jarden’s sector favourites are CSL ((CSL)), as one of higher-quality stocks expected to enjoy multi-year top line, margin and cashflow improvements, as well as ResMed ((RMD)), as the latter continues to win more market share and equally still has the potential to further improve margins.

Among smaller-sized companies in the sector, Jarden’s preference lays with Telix Pharmaceuticals ((TLX)), followed by Integral Diagnostics ((IDX)), assuming the merger with Capitol Health ((CAJ)) goes ahead, and Regis Healthcare ((REG)).

The analysts observe the pathology sector in particular is making significant investments in AI led by Sonic Healthcare ((SHL)) while Ramsay Health Care and Integral Diagnostics appear to be investing the most in technology.

Sector analysts at Macquarie highlight the healthcare sector delivered the highest EPS growth in Australia in August growing at an average of 7%. But the sector remains polarised and there’s a lot of divergence hiding behind that average.

Regardless, average EPS growth throughout FY09-FY19 had been 8% per annum, but that number had sunk to 5% over FY19-FY24. Conclusion: the bad covid-days might increasingly be ready to be relegated to the past.

Macquarie’s sector preferences are Ansell ((ANN) first, followed by CSL, Fisher & Paykel Healthcare ((FPH)), Pro Medicus ((PME)), and ResMed. All are rated Outrperform (Buy-equivalent).

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As interest rates have embarked on a downward sloping trajectory, even though the RBA is a global laggard, JP Morgan highlights AREITs will be among key beneficiaries on the ASX.

Excluding all-dominant sector leader Goodman Group ((GMG)), the sector seems poised for a three-year CAGR of 5.3%, well above the negative growth suffered over the past two financial years. Large-cap AREITs excluding Goodman Group are expected to grow on average by 7-8% CAGR (which would be the highest pace in ten years).

While the sector has already enjoyed a decent rally, JP Morgan believes average valuations are still below historical trends ex-Goodman.

JP Morgan has Overweight ratings for Scentre Group ((SCG)), GPT ((GPT)), Dexus ((DXS)) and Charter Hall ((CHC)).

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Viridian Financial Group has equally shared its portfolio preferences:

Overweight Healthcare and Tech: These sectors are expected to benefit from strong demand for healthcare services and products, and high demand for AI-enabled products and data centres.

Underweight Banks and Resources: These sectors face challenges due to economic uncertainties and lower demand for bulk commodities. The focus is on managing risks and navigating economic uncertainties.

Positive on Copper and Gold: Long-term demand for copper is driven by industrial and energy transition applications, while gold is seen as a safe-haven asset.

Neutral towards rates: The portfolio maintains a neutral stance towards interest rates, with a focus on building positions in sectors that can benefit from rate cuts and improved economic conditions.

Overweight Industrials: The industrial sector is expected to benefit from diversified business models and easing labour cost pressures, contributing to strong performance and improved profitability.

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Post August, the Asia Conviction List at Goldman Sachs no longer includes Woolworths ((WOW)), but the stock has retained its inclusion for the broker’s APAC Conviction List. The added twist here is those who are responsible for one list are the same as for the other.

Only three other ASX-listed companies are included in both selections:

-Qantas Airways ((QAN))
-Lynas Rare Earths ((LYC))
-Xero ((XRO))

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The select list of highest conviction calls from analysts at Ord Minnett has seen numerous changes post August results.

Gone are Select Harvests ((SHV)), Webjet ((WEB)) and Whitehaven Coal ((WHC)). Instead, Electro Optic Systems, Qoria, SiteMinder and Stanmore Resources have been included.

The full list of Ord Minnett’s Conviction calls consists of the following 14 companies:

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Electro Optic Systems Holdings ((EOS))
-Lindsay Australia ((LAU))
-Pinnacle Investment Management ((PNI))
-Qoria ((QOR))
-Red 5 (RED)
-Regis Healthcare ((REG))
-SiteMinder ((SDR))
-SRG Global ((SRG))
-Stanmore Resources ((SMR))
-Waypoint REIT ((WPR))

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Not too bad, is probably an accurate summary of how stockbroker Morgans perceived the performance of mining services companies throughout the August reporting period. One key problem for the sector is ongoing tough conditions for junior exploration companies, which also remains Citi’s core point of attention when it comes to assessing the outlook for a company such as Imdex ((IMD)).

As per usual, activity levels are by no means uniform across the sector with lithium bleeding profusely but gold, iron ore, gas and wind providing plenty of offset. Morgans does highlight the risks for iron ore are rising.

Two sector favourites have been identified: ALS Ltd ((ALQ)) and Civmec Singapore ((CVL)).

The first one has been chosen for the positive trajectory in margins for the Life Sciences division while Civmec has re-located to the ASX and the broker sees potential for a re-rating.

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Morningstar saw no reason to make any changes to its selection of Best Buys on the ASX. That selection continues with the following 14 companies:

-IGO Ltd ((IGO))
-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-Endeavour Group ((EDV))
-Santos ((STO))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Brambles ((BXB))
-Dexus ((DXS))
-SiteMinder ((SDR))
-APA Group ((APA))
-Fineos Corp ((FCL))
-ResMed ((RMD))

Investors should be aware Morningstar’s selection is traditionally centred around a seemingly cheap valution (or at least: undervalued) without taking into account additional factors such as corporate quality or the economic cycle. An undervalued valuation is not a timing tool and some inclusions have literally grown a beard while on Morningstar’s list (think Aurizon Holdings).

It also shouldn’t surprise to see companies such as TPG Telecom, the ASX, Dexus and Bapcor included; one look at the respective share price charts will provide plenty of explanation. But there’s always room for a surprise and in the current selection I would point towards SiteMinder and ResMed as being different’ from the other inclusions.

Banks, Miners & Quality Small Caps

“The strength of the Australian banking sector is difficult to reconcile with the fundamentals.

“The sector has generated an extraordinary total return of ~50% over the last twelve months, despite a tepid earnings growth outlook and increasingly extreme valuations.”

The quote is from Wilsons latest strategy update released this week but it could have been written at any point during the past nine months or so. Banks have surprised friend and foe. Sector valuations look extreme while market forecasts remain for tepid growth. The phenomenon hasn’t been limited to the ASX.

At times, macro forces over-rule conditions on the ground and with the world looking forward to, and preparing for central bank rate cuts, there simply was no stopping the flood of money descending upon the global banking sector.

Meanwhile, resources stocks experienced large outflows as the global economy was clearly slowing, pressured by higher-for-longer interest rates, and ongoing moribund conditions in China.

It created an ever-widening gap between expensive’ banks and cheaply priced’ resources stocks. Brokers started initiating upgrades for BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue ((FMG)) but it was clear a catalyst was needed.

That catalyst could have arrived this week with China’s latest stimulus announcement to put more oomph in its sluggish economy, but price action a few days after the announcement suggests there remains a lot of scepticism among investors when it comes to China and its economic trajectory.

Plenty of expert voices around to tell investors not all resources stocks look undervalued. UBS, for example, maintains iron ore is not a sector to get too excited about. 

Two factors are currently undeniably working in favour of resources:

-Large investors can be underweight banks or resources, but given the index weight each represents locally, they cannot be underweighted both. If there is a catalyst to move out of expensive’ into cheap’, as has happened this week, this might well become a self-fulfilling process.

-Traditionally, the November-February period marks a strong performance for China-related commodities. That is only five weeks away.

The above mentioned strategists at Wilsons highlight two additional important points:

-Iron ore miners are equally unattractive’ from a fundamental point of view (Wilsons’ Focus Portfolio is underweight both banks and iron ore miners). Wilsons’ preference lays with commodities that have attractive long-term supply versus demand outlooks, such as copper, gold, oil & gas, and lithium.

-The market is relatively expensive’ in a broader sense with the banks simply priced at the more extreme level (i.e. more expensive among expensive stocks)

Wilsons’ Focus Portfolio retains plenty of exposure to healthcare and technology stocks.

Strategists at Morgan Stanley highlight the duration of this week’s rotation out of banks into commodities-related exposures is dependent on the direction of commodity prices as well as the market’s acceptance of the soft landing’ narrative. Morgan Stanley’s portfolio is Overweight Diversified Miners, gold and energy, with explicit mentioning of uranium.

Earlier in the week, pre-China announcement, JP Morgan had placed everything related to iron ore on a positive outlook, including Deterra Royalties ((DRR)) and Mineral Resources ((MIN)).

UBS, on the other hand, remains bearish on the medium-term outlook for iron ore. This week’s sector update on China stimulus and after plenty of questions from the client base, sees UBS highlighting its Buy rating for South32 ((S32)). Both BHP and Rio Tinto remain Neutral rated. Fortescue and Mineral Resources remain on Sell.

On a broader, global view, UBS strategists believe small caps are poised to outperform (with 3X more floating rate debt than large caps), as remains Quality, and to a lesser extent so do growth stocks.

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Canaccord Genuity strategist Tony Brennan and his team have adopted a different angle, centred around risk’, but their conclusion is the same: it makes sense to build an Overweight position in commodities.

General optimism around inflation falling and central banks cutting interest rates has pumped up share prices in banks, insurers, REITs, discretionary retailers, media companies, and technology stocks; all are deemed to be beneficiaries of lower bond yields.

Certainly in Australia, many of these share price rallies are not being supported by an improving earnings outlook. The banks are but the obvious example. On Canaccord’s assessment, banks in Australia are trading on a higher PE than the broader market; an event without precedent over the past thirty years.

This skews risk towards a correction in share prices if/when earnings disappointment comes to light. What usually follows central bank interest rate cuts is a decelerating pace of economic momentum.

In contrast, food retailing and healthcare services are among the laggards in today’s share market, as are commodity stocks. The Energy and Materials sectors are currently priced on low PEs but also on low expectations, which, on a risk-adjusted basis, makes them relatively more attractive.

In simple terms: resources are priced for more risk that may not eventuate while banks and other segments are priced for very little risk that might prove too optimistic.

Canaccord’s Model Portfolio has removed Wesfarmers ((WES)) and Macquarie Group ((MQG)) and added James Hardie ((JHX)) and Evolution Mining ((EVN)).

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Citi’s previously cautious portfolio stance has become less cautious following the Federal Reserve’s -50bp rate cut, as Powell & Co’s  jump-start lowers the chances of an imminent US economic recession.

Citi’s asset allocation has thus moved towards Overweighting US equities, favouring consumer discretionary, communications and technology. In the commodities space, base metals don’t get more than a rather Neutral view, but Citi still likes precious metals, a lot.

All in all, it’s time for a shift towards a more pro-cyclical portfolio composition, suggest Citi strategists.

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Analysts at Jarden believe Australian investors should remain over-exposed to smaller retail companies. Not only has the recent August reporting season strengthened their conviction, the analysts also point out most of these companies are cycling weak performance numbers from last year, while their multiples have not yet re-rated.

One added observation is the Small Ordinaries index is still yet to bridge the relative performance gap with the larger ASX200 index that opened up since 2022.

Jarden’s key picks are Temple & Webster ((TPW)), Universal Store Holdings ((UNI)), Accent Group ((AX1)) and Nick Scali ((NCK)). Post-August, Jarden has downgraded Lovia Holdings ((LOV)) which is thus no longer part of the top favourites.

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As also explained in our own August Result Season 2024 Wrap ( https://fnarena.com/index.php/2024/09/24/august-result-season-2024-the-wrap/ ), it seems but fair to draw comparisons with 2019 when corporate results, in particular in the second half, were signalling all was not well with general conditions for corporate Australia and sizable dividend cuts fell upon unsuspecting shareholders as a result.

The key reason as to why many investors will not remember it as such is because soon afterwards all attention went to the new epidemic and that closed the books on anything else before or after.

Reece Birtles, Chief Investment Officer at Martin Currie, still remembers 2019 and he warns investors this time around the parallels are there for everyone to see.

Birtles says Martin Currie conducted more than 100 meetings and engagements with local company management teams in August and the key conclusion from these insights is that an exuberant share market seems in contradiction with how tough the situation on the ground is for many companies.

It looks like there’s a veritable challenge ahead for companies to continue growing earnings per share and/or retain their margins. Martin Currie is therefore cautiously avoiding companies that seem priced for perfection. This in particular applies to many in the local Growth segment, suggests Birtles. His preference thus lays with Value stocks that are priced relatively cheaply.

Under normal circumstances, when the cycle moves through a rough patch, as is the case currently, investors find safety in defensive businesses, but Birtles sees risk from too high valuations. Companies he does like instead include South32 ((S32)), Worley ((WOR)) and Flight Centre Travel ((FLT)).

Portfolio managers at T Rowe Price would second that general assessment. They too have shifted general preference towards the cheaper priced segments of the local share market. Apart from elevated valuations, T Rowe Price also finds market participants seem too confident the RBA is about to embark on policy loosening, widely expected to start in February next year.

T Rowe Price is not so sure.

DNR Capital has noted the tough environment has made life difficult for many a small cap company in Australia, and that observation stood out throughout the August results season for the Australian investment manager. The antidote is Quality.

Quality small cap companies managed to outperform, both against their peers as against the broader index, DNR highlights. Some of the stand-out performances have been delivered by Breville Group ((BRG)), Hub24 ((HUB)) and Netwealth Group ((NWL)). The communication by DNR doesn’t spell it out, but we can probably safely assume all three are currently owned by DNR Capital’s Emerging Companies Fund.

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Morgans’ big observation is that mid-cap gold producers have yet to reflect the fact precious metals are now in a new bull market. The broker foresees a general re-rating regardless of company size and where key assets are located.

History suggests, assures Morgans, gold prices benefit hugely from central banks cutting rates.

Model Portfolios, Best Buys and Conviction Calls

Macquarie’s Quant team has identified those defensive names on the ASX most likely to benefit from falling interest rates, including:

-Aristocrat Leisure ((ALL))
-Codan ((CDA))
-Coles Group ((COL))
-Fisher & Paykel Healthcare
-GWA Group ((GWA))
-Harvey Norman ((HVN))
-Netwealth Group ((NWL))
-Pro Medicus ((PME))
-REA Group ((REA))
-ResMed ((RMD))
-TechnologyOne ((TNE))
-Ventia Services ((VNT))
-WiseTech Global ((WTC))

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Barrenjoey’s updated Top Picks:

-Insurance Australia Group ((IAG)) among financials, as well as GQG partners ((GQG)) and Westpac ((WBC))
-Xero ((XRO)), Pexa Group ((PXA)) and Dicker Data ((DDR)) in the technology sector
-Vicinity Centres ((VCX)) and Abacus Storage King ((ASK)) among REITs
-South32 ((S32)), Lynas Rare Earths ((LYC)) and Perseus Mining ((PRU)) among miners and Strike Energy ((STX)) in the oil&gas sector
-ResMed ((RMD))
-Metcash ((MTS))
-Aristocrat Leisure
-Reliance Worldwide ((RWC))
-Brambles ((BXB))
-Seven Group ((SVW))

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Jarden’s Best Ideas among emerging companies (small and mid-cap):

-IPH Ltd ((IPH))
-Temple & Webster
-EVT Ltd ((EVT))
-Dicker Data ((DDR))
-Universal Store ((UNI))
-Nick Scali ((NCK))
-AUB Group ((AUB))
-Webjet ((WEB))
-Integral Diagnostics ((IDX))
-Capricorn Metals ((CMM))
-Michael Hill ((MHJ))
-NRW Holdings ((NWH))
-Light & Wonder ((LNW))
-Pointsbet ((PBH))
-National Storage ((NSR))
-Ingenia Communities ((INA))
-Karoon Gas ((KAR))
-Domain Holdings Australia ((DHG))
-Pepper Money ((PPM))
-Telix Pharmaceuticals ((TLX))

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Stockbroker Morgans’ Best Ideas, freshly updated post the August results season:

-The Lottery Corp ((TLC))
-CSL ((CSL))
-QBE Insurance ((QBE))
-Woodside Energy ((WDS))
-GQG Partners ((GQG))
-WH Soul Pattinson ((SOL))
-ALS Ltd ((ALQ))
-Reliance Worldwide ((RWC))
-Beacon Lighting ((BLX))
-Amotiv ((AOV))
-Universal Store Holdings ((UNI))
-Elders ((ELD))
-Acrow ((ACF))
-Maas Group ((MGH))
-Karoon Energy ((KAR))
-ResMed ((RMD))
-NextDC ((NXT))
-Mach7 Technologies ((M7T))
-Camplify Holdings ((CHL))
-Superloop ((SLC))
-Treasury Wine Estates ((TWE))
-ClearView Wealth ((CVW))
-PolyNovo ((PNV))
-Flight Centre ((FLT))
-BHP Group ((BHP))
-Rio Tinto ((RIO))
-South32 ((S32))
-Dalrymple Bay Infrastructure ((DBI))
-Cedar Woods Properties ((CWP))
-Dexus Industria REIT ((DXI))
-HomeCo Daily Needs REIT ((HDN))
-Qualitas ((QAL))

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Post August, the Asia Conviction List at Goldman Sachs no longer includes Woolworths ((WOW)), but the stock has retained its inclusion for the broker’s APAC Conviction List. The added twist here is those who are responsible for one list are the same as for the other.

Only three other ASX-listed companies are included in both selections:

-Qantas Airways ((QAN))
-Lynas Rare Earths ((LYC))
-Xero ((XRO))

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The select list of highest conviction calls from analysts at Ord Minnett has seen numerous changes post August results.

Gone are Select Harvests ((SHV)), Webjet ((WEB)) and Whitehaven Coal ((WHC)). Instead, Electro Optic Systems, Qoria, SiteMinder and Stanmore Resources have been included.

The full list of Ord Minnett’s Conviction calls consists of the following 14 companies:

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Electro Optic Systems Holdings ((EOS))
-Lindsay Australia ((LAU))
-Pinnacle Investment Management ((PNI))
-Qoria ((QOR))
-Red 5 (RED)
-Regis Healthcare ((REG))
-SiteMinder ((SDR))
-SRG Global ((SRG))
-Stanmore Resources ((SMR))
-Waypoint REIT ((WPR))

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Morningstar’s selection of Best Buys on the ASX:

-IGO Ltd ((IGO))
-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-Endeavour Group ((EDV))
-Santos ((STO))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Brambles ((BXB))
-Dexus ((DXS))
-SiteMinder ((SDR))
-APA Group ((APA))
-Fineos Corp ((FCL))
-ResMed ((RMD))

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Key Stock Picks for the year-ahead nominated by analysts at Bell Potter:

-Among listed investment companies (LICs); Australian Foundation Investment Company ((AFI)), Metrics Master Income Trust ((MXT)), and MFF Capital Investments ((MFF))

-Agriculture & fast moving consumer goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; TechnologyOne ((TNE)), Gentrack ((GTK)), and REA Group ((REA))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and McMillan Shakespeare ((MMS))

-Real Estate; Dexus Convenience Retail REIT ((DXS)), HealthCo Healthcare & Wellness REIT ((HCW)), and GDI Property Group ((GDI))

-Retailers; Premier Investments ((PMV)), Universal Store Holdings ((UNI)), and Propel Funeral Partners ((PFP))

-Aerospace & Defence; Electro Optic Systems ((EOS)) and Austal ((ASB))

-Industrials; Brickworks ((BKW)), IPD Group ((IPG)), and Cleanaway Waste Management ((CWY))

-Healthcare; Telix Pharmaceuticals ((TLX)), Cyclopharm ((CYC)), Aroa Bioscience ((ARX)), MedAdvisor ((MDR)), and Neuren Pharmaceuticals ((NEU))

-Gold sector; Capricorn Metals ((CMM)) and Santana Minerals ((SMI))

-Base metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), and Mineral Resources ((MIN))

-Strategic Minerals; Alpha HPA ((A4N)), IperionX ((IPX)), and Liontown Resources ((LTR))

-Energy sector; Boss Energy ((BOE)) and Paladin Energy ((PDN))

-Mining services; Seven Group Holdings ((SVW)), Mader Group ((MAD)), and SRG Global ((SRG))

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Morgan Stanley’s Australia Macro+ Focus List contains the following 10 stocks:

-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-CSL ((CSL))
-Macquarie Group ((MQG))
-Origin Energy ((ORG))
-Paladin Energy ((PDN))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Treasury Wine Estates ((TWE))
-Woodside Energy ((WDS))

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Morgan Stanley’s Macro+ Model Portfolio consists of the following 32 constituents:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Goodman Group ((GMG))
-Scentre Group ((SCG))
-Stockland ((SGP))
-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-Domino’s Pizza ((DMP))
-The Lottery Corp ((TLC))
-Wesfarmers ((WES))
-James Hardie ((JHX))
-Orica ((ORI))
-Coles Group ((COL))
-Treasury Wine Estates ((TWE))
-CSL ((CSL))
-ResMed ((RMD))
-AGL Energy ((AGL))
-Origin Energy ((ORG))
-Telstra ((TLS))
-Transurban Group ((TCL))
-BHP Group ((BHP))
-Newmont Corp ((NEM))
-Rio Tinto ((RIO))
-South32 ((S32))
-Paladin Energy ((PDN))
-Santos ((STO))
-Woodside Energy ((WDS))

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Macquarie Wealth’s recommended Growth Portfolio:

-Goodman Group ((GMG))
-Seek ((SEK))
-Aristocrat leisure ((ALL))
-Northern Star ((NST))
-CSL ((CSL))
-Computershare ((CPU))
-NextDC ((NXT))
-Flight Centre ((FLT))
-Mineral Resources ((MIN))
-Cleanaway Waste Management ((CWY))
-Steadfast Group ((SDF))
-Arcadium Lithium ((LTM))
-ResMed ((RMD))
-Pexa Group ((PXA))
-Treasury Wine Estates ((TWE))
-Viva Energy ((VEA))
-Xero ((XRO))

Macquarie Wealth’s recommended Income Portfolio:

-Suncorp Group ((SUN))
-Telstra ((TLS))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-ANZ Bank ((ANZ))
-BHP Group ((BHP))
-CommBank ((CBA))
-Premier Investments ((PMV))
-Coles Group ((COL))
-Viva Energy ((VEA))
-Atlas Arteria ((ALX))
-Aurizon Holdings ((AZJ))
-APA Group ((APA))
-GPT Group ((GPT))
-Deterra Royalties ((DRR))
-Metcash ((MTS))
-Amotiv ((AOV))
-Charter Hall Retail REIT ((CQR))
-Amcor ((AMC))

In December, Shaw and Partners released its 10 Best Ideas to benefit from the anticipated small caps’ revival in 2024.

The selected ten:

-AIC Mines ((A1M))
-Austin Engineering ((ANG))
-FireFly Metals ((FFM)), previously AuTeco (AUT)
-Chrysos ((C79))
-Gentrack Group ((GTK))
-Metro Mining ((MMI))
-MMA Offshore ((MRM))
-Peninsula Energy ((PEN))
-ReadyTech Holdings ((RDY))
-Silex Energy ((SLX))

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Macquarie’s ASX Quality Compounders

The highest quality compounders’ as identified by Macquarie quant research inside the ASX300:

-James Hardie ((JHX))
-Cochlear ((COH))
-REA Group ((REA))
-TechnologyOne ((TNE))
-ResMed ((RMD))
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure ((ALL))
-Spark New Zealand ((SPK))
-Codan ((CDA))
-Clinuvel Pharmacauticals ((CUV))
-Redox ((RDX))

Given Macquarie’s research strong leaning on the past five years, with high barriers to match, the following 11 companies fell just outside the above list:

-Fisher & Paykel Healthcare ((FPH))
-Medibank Private ((MPL))
-Coles Group ((COL))
-The Lottery Corp ((TLC))
-Lovisa Holdings ((LOV))
-CSL ((CSL))
-IDP Education ((IEL))
-Pinnacle Investment Management ((PNI))
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

My research and All-Weather stock selections are 24/7 available for paying subscribers: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

FNArena Talks: Videos

-Pre-August interview with Livewire Markets: https://www.youtube.com/watch?v=e3FC-EITqCA

-Post-August interview with Fat Tail Investments: https://www.youtube.com/watch?v=CNvS6si42DY&t=1s

-Post-August interview with Switzer TV: https://www.youtube.com/watch?v=eJwTscS9YuM&t=3s

See also: August Result Season 2024: The Wrap: https://fnarena.com/index.php/2024/09/24/august-result-season-2024-the-wrap/

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Attached: FNArena’s final Monitor for the season.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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