Quarterly Update :: Q4 FY 2023 - Is the tide about to run out!
General Advice Warning :: Please consider any advice or views provided in the below, general in nature and that no consideration has been given to your personal needs, objectives or circumstances. Unless it is indicated otherwise. You should consider if this advice is appropriate for you.
Quarterly Update :: Q4 FY 2023 - Is the tide about to run out!
One of Warren Buffett's famous quotes is: “Only when the tide goes out do you learn who has been swimming naked.”
Welcome to a belated 4th Quarter Portfolio Update. Apologies for the delay in delivering this. As you will read below, there has been a lot to take into consideration over the past quarter and even as I am writing this after the reporting season in the US and in the midst of the Australian truth season this has thrown caution to the wind and confused the outlook even more.
For the last quarter of the Australian Financial year (Q4 FY23) global shares gained with the advance led by developed markets, notably the US, while emerging market stocks lagged behind. Enthusiasm over AI (Artificial Intelligence) boosted technology stocks. Major central banks continued to raise interest rates in the period although the Federal Reserve Board and Reserve Bank of Australia elected to stay on hold in June. Government bond yields also rose (meaning prices fell).?
The US share market rallied +8.6%, whilst the tech heavy Nasdaq posted a +13.1% gain. The NASDAQ has now returned +32.3% over the first 6 months of 2023. Japanese shares also performed very strongly, returning +18.5% as they benefitted from lower valuations, a weak currency and a central bank committed to maintaining expansive monetary policy. The German DAX and French CAC 40 indices followed behind with returns of +3.3% and +2.9% respectively. FTSE Global Markets UK shares struggled, returning -0.3%, as sticky inflation will likely lead to more rate rises from the Bank of England . Chinese shares continued to struggle returning -6.1% as a slower than expected COVID reopening and ongoing tensions with the US weighed on the nation’s economic outlook. Australian shares performed reasonably well with the S&P/ASX Accumulation Index returning +1.0%.
Some of the view’s that are catching my attention and I am tending to agree with are:
Overall, with the mixed signals from economic data, the current market valuations and projections on earnings, defensive positioning within portfolio’s remains the focus.?At this stage the tide is only low for Central Banks globally and for those who were late to the rate increase party (US Fed and Australia’s RBA for example), because inflation remains too high. As higher rates play through debt and equity markets, I am sure the low tide in those markets will start to highlight those stranded swimmers. Its these shocks that need to be washed out and avoided.
Portfolio Commentary
Last quarter I referred to the fact the ASX 200 index has traded flat and this has lengthened through Q4. This was in part to highlight that portfolio’s in general have shown resilience against the main Australian index as a comparison. It was also to raise the need that portfolios have exposure to international assets. I still am of the view that portfolios are to be actively managed to drive outperformance and manage risk. I expect quality equities will be the driver of good performance throughout this year. An active approach is still needed through locking in gains and looking to reapply those funds into ‘cheaper’ quality names with good pathways to grow.
Preview to the next chapter of the cycle: Lost and found: Small & Micro-cap opportunities
The ASX Small Ords has had a horror 18 months underperforming the ASX 50 by 19% and down 22% since the start of 2022. But there are good reasons to believe that we are at an inflection point:
Small-cap underperformance is near the low of a 20-year range
Since the start of 2022 small caps have been in a downward trend. Small Ordinaries are down 22% and worse ex-resources (ASX small industrials) are down 24%. The performance differential between small and large industrials has widened to 2014 levels and trading near the bottom of a 20-year range. Rising interest rates and falling investor sentiment have institutional and retail investors alike shying away from this segment of the market. While it’s too early to call the bottom, we think there are reasons for optimism.
Fundamentals are turning around
Fundamental factors such as leverage and profitability (ROE) deteriorated after the 2020 COVID-19 pandemic as the cost of funding was slashed and demand came roaring back but as economic conditions worsen companies can ill afford to let fundamentals take a back seat. Fundamentals are in fact expected to improve materially and forecast to return to long run levels over the next 12 months placing them in a better position to weather a slowdown. Given their scale and exposure, small cap companies are inextricably linked to the fortunes of the domestic economy with Australian-based sales (FY22) representing 84% across the cohort. We believe this can provide some further insulation from issues facing global peers, such as:
领英推荐
The Morgans Financial Limited Research Team have identified 15 small and micro caps that have continued to thrive despite the uncertain economic backdrop. They are backed by favourable trading conditions, sound management teams, solid balance sheets and valuation support. Features that we think will distinguish them from their small cap peers.
Outlook :: Someone will be right (again)
Even though I wrote this title last quarterly update, it still holds true and if anything probably underlines that markets are in a holding pattern until: Something economically breaks (through central banks over tightening), or un-employment remains low, earnings stay robust and inflation is persistently above target, leaving markets to ebb and flow as its done so for 2 years. Globally equity markets are now trading with a 12month forward P/E slightly above their 10yr averages. S&P 500 is at 19x, Europe is 12x, the UK at 11x, Emerging Markets is 12x and Australia is 15.5x. With this pricing representing a slight premium I am inclined to continue with the current thesis (lock in profits, seek cheap valuation quality Equities, continue holding Fixed Income and increase Cash).
Whilst every market strategist out there with much better knowledge and tools to call upon has a view, my opinion is based on some of the simple human behaviours and signals we are witnessing through advertising, car sales, home sales, company reports, CEO insights.
Here are some notes from a few leaders we have had present internally:
Jeremiah Lane , Partner and Portfolio Manager from KKR .?KKR are one of the biggest private equity and private credit investors in the world (I personally think they are the smartest people in finance) so their insights into what is actually happening is very relevant.
Rio Tinto ’s CEO Jakob Stausholm after their first half profit result.? Getting access to CEO’s of this calibre is an amazing edge Morgans provides.?Highlights of the meeting:
As you can see from the above, resilience in numerous economies is surprising many and this is leading to expectations being pushed out. Business leaders have to pursue growth and in RIO’s case now is a good time in the cycle to do so. Energy transition is going to be the biggest theme over the coming years and industry demand will be the front runners to secure supply.
Conclusion
I am still of the view markets will continue to remain directionless whilst economic data defies the markets sentiment. I reiterate that I am not sensing a drastic cause for concern over markets, in particular stocks, but the rapid changes in Interest Rates are yet to be seen throughout all interest rate sensitive instruments including debt and capital markets. This will surely reveal a few stocks and debt holders of businesses that forgot to don the swimmers before the tide ran out. Globally equity markets are priced near enough to 10yr earnings averages and when you consider the last 10 years have held the average P/E higher due to higher growth stocks (tech) I would like to see the market considerably cheaper before actively chasing overall exposure. This will hopefully come from greater clarity of forecast economic conditions and a moderate pull back in markets. The current opportunities in Equity markets are in the Small to Mid cap Australian stocks. Cheap valuations, strong balance sheets, robust management all provide protection from the large market swings.
A Quick Note: Artificial Intelligence (AI) from a market perspective
高盛 published a quick note on AI which I thought laid out some of the current thinking and how this development plays out for businesses and markets: Generative AI may boost corporate earnings, but the effects are hard to pin down.
For the complete article, please view here.
Should you have any further queries, please do not hesitate to contact me.
Regards
Scott Fraser
Private Client Adviser
Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
General Advice Warning :: Please consider any advice or views provided in the above, general in nature and that no consideration has been given to your personal needs, objectives or circumstances. Unless it is indicated otherwise. You should consider if this advice is appropriate for you.
Financial Advisor to the Affluent | Seasoned Stock & Bond Portfolio Manager | Best-Selling Author
1 年Scott Fraser You have it all wrong. The market is returning to it's pre-COVID seasonality. This is a good thing. Remember "Sell in May and go away, but always remember to come back in November." This will again be a good year.