Rudi’s View: More Positives Than Negatives

This story features FLETCHER BUILDING LIMITED, and other companies. For more info SHARE ANALYSIS: FBU

In this week's Weekly Insights:

-More Positives Than Negatives
-New Market Leadership?
-2024 The Year Of Gold Miners?
-All-Weathers Welcome Soul Pattinson
-Model Portfolios, Best Buys & Conviction Calls

By Rudi Filapek-Vandyck, Editor

More Positives Than Negatives

Judging from corporate updates, both internationally and locally, the general context has created a tricky framework for investors, as also yet again confirmed by Fletcher's Building's ((FBU)) disappointing trading update on Monday.

It's not as if management and shareholders look over their shoulders feeling lots of excitement, but on Monday the shares dived yet another -10% for a total loss in capital since August 2021 in excess of -60%. The fact the New Zealand builder regularly pays out a dividend hardly compensates for the suffering endured.

Last week offered similar experiences from Sims ((SGM)), GrainCorp ((GNC)), Baby Bunting ((BBN)), Lindsay Australia ((LAU)), and Tourism Holdings ((THL)), among others.

Yet, the impact on consensus profit forecasts in Australia has almost been negligible. That's because for every disappointing market update there seems to be another one that manages to surprise on the upside. Think of REA Group ((REA)), Orica ((ORI)), and AGL Energy ((AGL)), but also Westpac ((WBC)) and National Australia Bank ((NAB)), and others.

The out-of-season results reporting in Australia is about to hit the accelerate button with companies including CSR ((CSR)), Aristocrat Leisure ((ALL)), and Incitec Pivot ((IPL)) scheduled to release operational financials this week, followed by ALS Ltd ((ALQ)), Elders ((ELD)), James Hardie ((JHX)), Nufarm ((NUF)), TechnologyOne ((TNE)), Webjet ((WEB)), and Xero ((XRO)), among others, before the end of the month.

Add-in the fact Australian companies are increasingly updating through quarterly trading updates and there's a fair argument to be made investors locally nowadays are subjected to semi-quarterly reporting seasons a la Wall Street.

Face value experiences to date are mixed at best, see also the examples mentioned, but analysts and market strategists, both here and in the USA, are nevertheless of the view things are looking better than previously forecast.

Earnings forecasts in the US have risen as a result of March quarterly corporate updates. The underlying picture in Australia remains more volatile, also because mining operations and agricultural businesses have been impacted by bad weather, but so far it appears the balance is tilted towards more positives than negatives.

On Morgan Stanley's assessment, consensus is still forecasting average EPS to fall for the ASX200 by -6.8% for FY24, then to rise by 4.7% and by 4.6% in respectively FY25 and FY26. These numbers have only changed minimally over recent weeks.

While concerns over inflation, bond yields and delayed interest rate cuts, in combination with markets trading on above-average multiples, are dominating sentiment and financial news headlines, corporate updates have likely contributed to the cautiously optimistic tone that has returned post April's correction (if we can call it that).

Analysts at Macquarie have come to the same conclusion having witnessed 114 companies presenting and updating over three days the week prior (7-9 May) at the Macquarie Australia Conference. This year marks the 26th edition of what has arguably become Australia's most important corporate event.

Retail proved the stand-out negative surprise of this year's conference, suggest Macquarie analysts, as market updates from the likes of JB Hi-Fi ((JBH)), Temple & Webster ((TPW)), Endeavour Group ((EDV)), Super Retail ((SUL)), Coles Group ((COL)) and Vicinity Centres ((VCX)) either implied market forecasts won't be met, or confirmed Australian households are spending less or buying cheaper alternatives.

But net-net this year's conference was positive, concludes Macquarie, with companies including AGL Energy, HMC Capital ((HMC)), AUB Group ((AUB)), and Medibank Private ((MPL)) lifting their guidance, while trading updates from the likes of PolyNovo ((PNV)), Pinnacle Investment Management ((PNI)) and Regis Healthcare ((REG)) proved better-than-expected.

Macquarie's forecast is for the net positive trend for Australian companies, that looks to have started in the last AGM season in late 2023, to continue into the August results season. Daily evidence suggests, however, there remains plenty of room for disappointments, reflective of the polarised dynamics that nowadays characterise the global economic picture.

As far as the outlook for the share market goes, I am still siding with the optimists, as I have since October last year, though I also believe investors should be prepared for a lot more volatility.

Anticipating exactly where the next corporate disappointment might come from is a mug's game, so it's probably best portfolios have exposure to companies that should perform well medium-to-longer term, irrespective of the potential for an unexpected short-term set-back.

I'd be inclined to think my recent writings offer plenty of background and ideas:

–https://fnarena.com/index.php/2024/05/09/rudis-view-arcadium-lithium-goodman-group-paladin-pexa-treasury-wine/

–https://fnarena.com/index.php/2024/05/08/rudis-view-opportunity-in-data-centres/

–https://fnarena.com/index.php/2024/05/01/rudis-view-quality-reigns-and-how-to-identify-it/

FNArena's Corporate Results Monitor only covers actual financial results, and we do our best to keep up with the pace throughout the rest of the month: https://fnarena.com/index.php/reporting_season/

At the macro-level, I remain of the view that the prospect of interest rate cuts, delayed or otherwise, remains a positive carrot for markets, unless economies stumble into recessions.

Below are some of the more interesting views and research updates I came across recently. Things to consider?

New Market Leadership?

Longview Economics has observed something's happening that hasn't been seen for quite a while… the S&P500 index as the equal-weighted S&P500 index are pretty much moving at similar pace in 2024.

In years prior, led by the Magnificent Seven and a small cohort of GLP-1 and AI beneficiaries, the equal-weighted index has significantly underperformed. Longview therefore suggests what we are experiencing this year is a new phase in the equities up-trend, one that is no longer singularly dependent on a small group of extraordinary achievers only.

In other words: the up-trend is broadening. It's time for the rest of the market, for the laggards to catch up.

In the slipstream of this observation, Longview highlights US equities already are no longer the best performing in 2024. The suggestion made is investors are starting to position for looser policies from central banks around the globe (this in contrast to some of the views that are still being aired by some in Australia and in the USA).

If Longview's assessment proves accurate, it won't be long before all major central banks are cutting interest rates, thereby fueling the next economic upswing. The world shall witness a fresh consumer spending boom and above average nominal GDP growth. This shall translate into sector leadership switching back to the old economy and 'value' sectors that dominated in the nougthies.

Think commodities, consumer cyclicals, banks, and small and mid-cap companies generally.

2024 The Year Of Gold Miners?

Commodities analysts at UBS think gold prices are likely to rise as the Federal Reserve starts cutting interest rates, exact starting date as yet unknown.

The added observation is it hasn't been easy for investors to accumulate positive experiences from investing in gold mining stocks, and that checkered picture has continued into 2024 with unpredictable weather impacts and delays in Fed rate cut forecasts leaving their mark on share prices.

Nevertheless, gold miners are cheaply priced, maintains the broker, and with gold prices likely to rally as those rate cuts come through, 2024 might well turn into the year of the gold miners. History shows when gold bullion experiences a bull market, shares in gold miners perform even better, also because shares have to play catch-up from undervalued levels.

For good measure: UBS acknowledges there remains risk for further disappointment as inflation, operational uncertainties and capex budgets are all cum updates with the end of FY24 approaching. On the broker's projections, the sector in Australia is trading on a free cash flow yield of 6% over FY24/25, with this number to increase to 10% when measured through the present spot price.

UBS has upgraded Bellevue Gold ((BGL)) to Buy (target $2) and already had Buy ratings for Evolution Mining ((EVN)), DeGrey Mining ((DEG)), and Gold Road Resources ((GOR)). There's only one Sell rating in the broker's research universe; Regis Resources ((RRL)).

All-Weathers Welcome Soul Pattinson

The question has landed in my inbox quite frequently in recent months: Rudi, why is Washington H. Soul Pattinson ((SOL)) not included in your selection of All-Weather Stocks?

It is a great question, and to my own embarrassment, my responses were looking less and less convincing, and I knew it too!

For those not familiar with 'Soul Patts', the company finds its origin in a single pharmacy store in Sydney's Pitt Street in 1886 and has been listed on the ASX since 1903. Today, its market cap is approaching $12bn and the business is a truly diversified asset manager, combining listed with unlisted assets, including corporate credit, coal, telecommunication, and more, alongside a controversial cross-ownership with Brickworks ((BKW)).

Soul Patts is a member of the ASX100 and in possession of one of the strongest dividend payment profiles to match that achievement. Management's ability to create value for shareholders over the years has been nothing but admirable.

Washington H. Soul Pattinson is now part of my selection of All-Weather Performers on the ASX, where it joins Wesfarmers ((WES)) and Macquarie Group ((MQG)), equally two of the best asset managers on the local exchange. I think there's a message in there, both for myself and for investors following my research: asset managers can be an excellent source of enduring, sustainable rewards over a long period.

This, of course, is not to be applied across the board. Look, for example, at the long-winded shrinkage that has befallen shareholders in Perpetual ((PPT)).

Infratil ((IFT)), which is an $8bn asset manager, specialised in infrastructure and headquartered in New Zealand, also features regularly in questions received. Infratil has been listed on the ASX since 2010, but I never heard its name, in questions received or otherwise, until recently.

I have a strong suspicion growing interest locally is directly related to Infratil's 47.99% ownership in Canberra Data Centres (CDC), one of the largest operators of data centres in Australia (as also mentioned in Weekly Insights on data centres last week).

This is not dissimilar from awakening investor interest in Global Data Centre Group ((GDC)), which is part owner of AirTrunk, alongside Macquarie Group.

While Infratil is nowhere near to be included as an All-Weather Performer, it does offer investors an alternative for exposure to the strong growth story for data centres in the years ahead.

Model Portfolios, Best Buys & Conviction Calls

A dedicated update on Model Portfolios, Top Picks and Best Buy ideas, and other calls made with Conviction will be published on the FNArena website every Thursday morning around 10am.

Last week's update: https://fnarena.com/index.php/2024/05/09/rudis-view-arcadium-lithium-goodman-group-paladin-pexa-treasury-wine/

All Weekly Insights and Thursday updates are grouped together under Rudi's Views, with past updates going back as far as 2006: https://fnarena.com/index.php/analysis-data/rudis-views/

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(This story was written on Monday, 13th May, 2024. 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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