Rudi’s View: Fear & Greed (Rinse & Repeat)

This story features WHISPIR LIMITED, and other companies. For more info SHARE ANALYSIS: WSP

In this week's Weekly Insights:

-Fear & Greed (Rinse & Repeat)
-February Results: Final Notes & Observations

By Rudi Filapek-Vandyck, Editor

Fear & Greed (Rinse & Repeat)

…and as it turned out, yet again, all roads that started off from the Federal Reserve's tightening policy lead to the next US bank failure.

Few of us, investors in Australia, would have heard about Silicon Valley Bank before the week past, but we're going to hear and read a lot about it in the days and weeks coming.

On Monday morning, when FNArena has also been struck by a tech failure at the datacentre that hosts our website, the most important news is that deposit holders will get their money back, in full, while bond holders and shareholders will pay the ultimate price of risk.

This likely means even a sniff of a full-blown banking crisis in the US, let alone worldwide, has most likely been averted. This is not a re-run of 2008, though we all need to be aware the situation remains fluid and unexpected developments can still come out of the proverbial woodwork.

It's early days, but enough details have already been published to underpin one firm conclusion: 'SVB' failed because of insufficient risk management. Whether this is the result of managerial incompetence or simply greed shall always remain the topic of biased debates, but if I were a betting man I'd back the second option (with some incompetence thrown in as the proverbial cherry).

Picture this: prior to joining SVB as Chief Administrative Officer, Joseph Gentile was the Chief Financial Officer at Lehman Brothers' Global Investment Bank up until 2007, one year before Lehman collapsed and effectively deepened the Global Financial Crisis. Not wanting to single out this particular persona, but sometimes, indeed, reality does beat imagination.

Another interesting fact is SVB seems to have exploited a change in the regulatory requirements by former president Trump in 2018.

Equally important: any direct exposures by banks or companies in Australia should be minimal. Canva, not listed, has direct exposure while funds manager Pengana stands to lose -2% in its International Equities Fund. Some smaller tech companies, including Whispir ((WSP)), might have a deposit with SVB, but these should be recovered under the freshly launched US government guarantee.

The Federal Reserve also announced on Sunday it would make additional funding available through a new Bank Term Funding Program. Anyone dreaming of the Fed winding back QT or re-starting QE, or cutting interest rates is a victim of wishful thinking. Interest rates will still go higher, and stay higher-for-longer.

Bond yields, however, are falling because of investors' knee-jerk response to seek safety first and ask questions later.

February Results: Final Notes & Observations

The things we can control, and the ones we don't…

I know many among you value the service we built here at FNArena (and new additions are in the works). Truth is, FNArena and its multitude in data and tools equally forms an integral part of my personal daily routines and market observations & insights, so when power problems at the datacentre makes accessing the website no longer possible, I too am robbed of my primary tools and data.

Hence why last week's promise to zoom in on the February performances of All-Weather Companies and their outlook has been postponed until next week.

So for now… let's look into the final observations from other expert voices.

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One of the segments that surprised in a positive manner in February were contractors and engineers servicing mining, energy companies and infrastructure projects. As pointed out by analysts at Macquarie, when the dust settled over the February results season, the sector had generated more 'beats' than 'misses', which was quite rare this time around.

Two of the stand-out performances were delivered by Ventia Services ((VNT)) and Seven Group Holdings ((SVW)), the broker believes.

The most negative disappointment was reserved for Downer EDI ((DOW)).

Macquarie acknowledges the macro outlook remains supportive for the sector, with spending on mining and infrastructure projects unmistakably supportive, but the broker warns investors should not ignore the 'micro', i.e. the company-specific dynamics and characteristics.

Macquarie's sector coverage is limited to six companies, and only three are rated Outperform: Ventia Services, Seven Group Holdings and Worley ((WOR)).

Monadelphous ((MND)), Downer EDI and NRW Holdings ((NWH)) are all rated Neutral.

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All in all, market strategists at Wilsons saw a "mixed bag" in corporate results in February, with pockets of resilience that should prove their value for investors as the earnings downgrade cycle unwinds further.

Key themes from the season that should be on investors' radar, according to Wilsons, include:

-Consumers are tightening their purse strings, although to date they remain selective in where to spend and where not to;

-Costs pressures remain;

-There is to date no sign of spending weakness in tourism or leisure;

-There might be improvement on the horizon for beaten-down housing related exposures.

Regarding the latter, Wilsons continues to hold James Hardie ((JHX)) shares in its Focus Portfolio.

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Stockbroker Morgans changed its sector call for ASX-listed technology stocks in December to Neutral from Underweight and, post the February results season, Morgans remains of the view true Quality will rise to the surface from the sector.

The sentence that sums it up nicely: "We expect that, given the relative value they create, quality tech names should continue to push through price rises with limited impact on demand."

Top picks according to the broker are Xero ((XRO)), nominated before staff layoffs were announced, REA Group ((REA)), and Seek ((SEK)).

Given technology has never been an index mover in Australia, notwithstanding the exchange's initiatives to become the regional hub for technology listings, Morgans has retrospectively built its own index comprised of six high quality ASX-listings. On this basis, the broker believes today's valuations are "fair value", vindicating that Neutral rating.

Share price weakness for Megaport ((MP1)) and Objective Corp ((OCL)) has led to upgrades to Add as the risk versus reward proposition is now regarded as compelling.

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Healthcare analysts at Macquarie have nominated CSL ((CSL)) and aged care operator Estia Health ((EHE)) as the two sector outperformers in February with both results proving materially better than the broker's forecasts.

The sector itself was dominated by margin pressures in February directing sector preferences towards those healthcare companies able to expand margins as the impact from covid and inflation subsides.

Relative to updated market forecasts, Macquarie reports its own margin expansion projections are greater for CSL, Healius ((HLS)) and ResMed ((RMD)), while more substantial margin contraction is still forecast for Sonic Healthcare ((SHL)).

No surprise, Sonic Healthcare is one of two Least Preferred sector exposures, with Cochlear ((COH)) the other nominee.

Most preferred are CSL, ResMed, Healius and Estia Health.

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From the Evans and Partners reporting season review:

"Our base case remains that the domestic economy will narrowly avoid a recession, however the earnings environment is anticipated to be more challenging as global economic activity slows and domestic consumption is curtailed. For these reasons, we continue to look towards high quality businesses with defensive earnings profiles, sustainable dividend yields and/or earnings momentum."

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Healthcare analysts at Jarden highlighted how capital management, including M&A, has become one defining feature for the sector over the past six months. All of CSL, Ramsay Health Care ((RHC)), Cochlear, ResMed and Integral Diagnostics ((IDX)) made at least one announcement during the period.

Looking ahead, Jarden believes Sonic Healthcare, Cochlear and ResMed appear best positioned for more announcements in the months ahead.

Jarden's preferred sector picks are CSL, ResMed, Ramsay Health Care and Integral Diagnostics -the latter two on attractive valuations- among larger cap companies and Aroa Biosurgery ((ARX)) and Telix Pharmaceuticals ((TLX)) for investors with a higher risk appetite (small caps).

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Financial services ex-banks saw lots of 'beats' and 'misses' and Morgans spotted the strongest results from QBE Insurance ((QBE)), Medibank Private ((MPL)), Challenger ((CGF)) and Tyro Payments ((TYR)). Disappointments came from Insurance Australia Group ((IAG)), nib Holdings ((NHF)), Pexa Group ((PXA)) and Generation Development Group ((GDG)).

Morgans' preference lays with (in order of preference): QBE Insurance, Computershare ((CPU)), Suncorp Group ((SUN)), Tyro Payments, Generation Development, Pexa Group, and Kina Securities ((KSL)).

Zooming in specifically on the insurers, Citi shares Morgans' preference for QBE Insurance, but is more circumspect on the different prospects for Insurance Australia Group and Suncorp. Citi still finds Medibank Private post cybersecurity breach "difficult to assess" and has upgraded nib Holdings to Buy on expectations of ongoing growth despite the requirement for further investments.

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Small cap analysts at UBS found the overall quality of financial results weaker in February while also noting large capex projects are increasingly being delayed. Higher cost inflation and interest rate rises are leaving their mark on the analysts' assessment.

UBS likes to refer to emerging companies instead of smaller caps, even though most will never graduate to the ASX100. Irrespectively, the broker's preferences lay with Breville Group ((BRG)), Corporate Travel Management ((CTD)), Hansen Technologies ((HSN)), IDP Education ((IEL)), IPH Ltd ((IPH)), Kelsian Group ((KLS)), NextDC ((NXT)), Nufarm ((NUF)), Ridley Corp ((RIC)) and Webjet ((WEB)).

Also worthy of a positive mention, UBS suggests, are Autosports Group ((ASG)), Infomedia ((IFM)), and Siteminder ((SDR)).

Thematically, the analysts explain, those preferred exposures can be categorised as:

-Defensive Growth (think IPH, Hansen Technologies and Kelsian Group)

-Cyclical Winners (such as Nufarm and Ridley)

-Structural Growers (Breville Group, IDP Education and NextDC)

-Re-opening Beneficiaries (Corporate Travel and Webjet)

As UBS's overview shows, companies enjoying upgrades to EPS forecasts were rather rare in February, with both Nufarm and Webjet among the exceptions (on macro-input since both report in May). Eagers Automotive ((APE)), Autosports Group, Flight Centre ((FLT)), Imdex ((IMD)), Inghams Group ((ING)), Servcorp ((SRV)) and Tyro Payments reported in February and saw analysts upgrading forecasts.

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Over at Macquarie, small cap specialists like to talk about Emerging Leaders. On Macquarie's assessment, the February results season brought out strong top-line performances, of course boosted by inflation, on lower margins and weak cash flows. EPS forecasts were generally downgraded post the season.

Many of such companies are now depending on a stronger second half to please investors and shareholders with the broker highlighting Prospa Group ((PGL)), Flight Centre, Baby Bunting ((BBN)), KMD Brands ((KMD)), Corporate Travel, G8 Education ((GEM)), Emeco Holdings ((EHL)), Maas Group ((MGH)), Corporate Travel, and AUB Group ((AUB)).

Not every H2 skew is treated as a negative with AUB Group included in the broker's Top Picks, alongside Bapcor ((BAP)), Kelsian Group, Monash IVF ((MVF)), Netwealth Group ((NWL)), and Seven Group Holdings.

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And in the end… February 2023 did not deliver the "bloodbath" that was priced in for A-REITs during the third quarter of 2023. Instead, real estate analysts at Evans and Partners saw trusts typically re-affirming guidance for FY23.

Rental income proved typically in line or even slightly better than expected. Those landlords enjoying CPI linkage in particular stood out from the pack, observe the analysts. Asset valuations were impacted, but there was offset through higher rents.

Interest costs are higher, and these will now act as a headwind to future growth for the sector generally.

While valuations seem attractive, Evans and Partners does believe newsflow is likely to remain negative, driven by pressure on asset valuations and increasing cost of capital. While balance sheets in general are considered robust, growth in distributions to shareholders and spending on developments are expected to remain subdued as managers are expected to stick with conservative strategies.

Evans and Partners is inclined to view ASX-listed REITs as long term opportunities. The broker's Top Three of Specialist A-REITs consists of: Arena REIT ((ARF)), HomeCo Daily Needs REIT ((HDN)), and RAM Essential Services Property Fund ((REP)).

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The ever so cautious Macquarie prefers the more defensive exposures among local REITs with sector preferences allocated to Dexus ((DXS)), GPT Group ((GPT)), Goodman Group ((GMG)), Arena REIT, HomeCo Daily Needs REIT, Dexus Industria REIT ((DXI)), and Qualitas ((QAL)).

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Sector analyst peers at Morgan Stanley have become more constructive on REITs with a retail exposure. Most preferred by Morgan Stanley is Scentre Group ((SCG)) which remains the only Overweight-rated among peers. The others are GPT Group and Vicinity Centres ((VCX)); both are rated Equal-Weight.

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Citi's February observations for the sector are not different from the analysts above, but this broker seeks sector safety & outperformance through operators that can grow their income. It is Citi's view that investors will reward those operators with downward protection, otherwise known as valuation support.

Citi's preferred A-REITs are Goodman Group, Region Group ((RGN)), Charter Hall Retail ((CQR)), and Abacus Property Group ((ABP)).

Both GPT Group and Charter Hall Long WALE REIT are seen as presenting "good value".

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The team of sector analysts at Jarden made the most changes throughout February, lifting National Storage REIT ((NSR)) to Buy, while upgrading Goodman Group, Region Group, Charter Hall, HMC Capital ((HMC)), and Charter Hall Social Infrastructure REIT ((CQE)) to Overweight.

On Jarden's rankings of ratings Overweight sits one step below Buy. Abacus Property was downgraded to Overweight from Buy.

Three REITs were downgraded to Underweight: Centuria Industrial REIT ((CIP)), Centuria Office REIT ((COF)), and Stockland ((SGP)).

On Jarden's analysis, earnings are still holding up for the sector, but cash flows are increasingly under pressure. This broker suggests investors should focus on cash flows from here onwards, warning any discounts to net tangible assets (NTA) won't close unless cash flow improves and shows attractive growth.

(This story was written on Monday, 13th March, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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