Rudi’s View: Defensives, Healthcare, Resources & Data Centres

This story features JAMES HARDIE INDUSTRIES PLC, and other companies. For more info SHARE ANALYSIS: JHX

By Rudi Filapek-Vandyck, Editor

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.

(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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P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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