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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.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- The Value Equity strategy may invest in derivatives (index futures) to obtain, increase or reduce exposure to underlying assets. The use of derivatives may restrict potential gains and may result in greater fluctuations of returns for the portfolio. Certain types of derivatives may become difficult to purchase or sell in such market conditions.