Rudi’s View: August Results; Polarisation & Divergence

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

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.

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)).

Soon the FNArena Monitor will be updated daily: https://fnarena.com/index.php/reporting_season/

See also: https://fnarena.com/index.php/2024/07/31/rudis-view-what-can-august-deliver/

Danielle On Video

FNArena’s Danielle Ecuyer participated in an expert panel discussing Droneshield ((DSE)), Zip Co ((ZIP)) and BHP Group ((BHP)).

The video: https://fnarena.com/index.php/fnarena-talks/2024/08/05/droneshield-zip-co-and-bhp/

All-Weather Portfolio FY24 Review

The FY24 review for the All-Weather Model Portfolio has received the green light from compliance at Vested Equities, and can be downloaded here:
https://www.fnarena.com/index.php/download-article/?n=DE2A4552-E2C7-4DC7-0A896CE5CF68ACD8

Prior years:

FY23: https://www.fnarena.com/index.php/download-article/?n=DFC11150-CB36-C777-1AA3EDA640E2F5BF

FY22: https://www.fnarena.com/index.php/download-article/?n=DFE7241B-9CD8-61F1-1602C581A8E539C4

FY21: https://www.fnarena.com/index.php/download-article/?n=DFF82691-E53E-3CF5-17A2337D72CDB54F

Video: Why FNArena & All-Weather Stocks

I’ve used my participation to the recent InvestmentMarkets’ conference to explain how/why FNArena started & what investors get out of it, including research in All-Weathers and Gen.Ai

The video: https://bit.ly/3A1pLuz

FNARENA VIDEO

Dani and I have put together a video to explain our focus (and enthusiasm as investors) for GenAi, the fourth industrial revolution:

https://fnarena.com/index.php/fnarena-talks/2024/07/15/investing-in-genai-the-fourth-industrial-revolution/

SPECIAL REPORT

Last month, FNArena published a 78 pages Special Report on GenAi, the fourth industrial revolution with lots of in-depth insights, forward projections, and useful links to companies for investors in the Australian stock exchange.

This Special Report remains exclusive for paying subscribers. Download your copy via the Special Reports section on the website.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 5th August, 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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