Rudi's View | Aug 07 2024
In this week's Weekly Insights:
-August Results; Polarisation & Divergence
-Where's Conviction?
-Danielle On Video
-All-Weather Portfolio FY24 Review
-Video: Why FNArena & All-Weather Stocks
By Rudi Filapek-Vandyck, Editor
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.
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