Six months ago, the tone of the February reporting season was overall a positive one. The onset of reflation and higher rates was being reflected in earnings upgrades. The market continued its march towards Value-style stocks as they were expected to benefit from the economic reopening.
Fast forward six months, the downturn has progressed more than the market had anticipated, and in Australia we are now paying the price for the rapid recovery through blow-out inflation readings, five rate rises, and a market selloff. This is on top of a new federal government, and now the death of the Queen.
Our analysis and one-on-one meetings with company management over August and September have highlighted that the consumer continues to remain strong despite the headwinds to cost of living, and companies remain upbeat.
The key theme impacting Australian companies is shrinking profit margins due to falling revenue and/or higher costs, but we are also seeing increased capex spend to spur growth. The companies that have the pricing power to charge more and offset costs will be ones that can pay back the piper and avoid losing in the current market environment.
The market thematic continues to play toward a more attractive outlook for Australia and Value compared to alternative regional and style propositions. Despite the Value style’s recent performance relative to Growth, we believe that we are still only part way through the normalisation of valuations and style returns.
Our bi-annual reporting season paper will cover the following in finer detail:
- Our top-down analytical and aggregated review of the reporting season’s results for S&P/ASX 200 stocks.
- A deeper dive into the issues and themes that are driving these results - based on the 100+ meetings with company management teams undertaken by the MCA investment team over the period.
- The big picture outlook for Australian equities and style investors.
- How our views are reflected in our high conviction Value Equity portfolio.