Springtime value for Australian equities

From

Reece Birtles

Legg Mason’s affiliate Martin Currie says that despite the ‘green shoots’ in consumer spending leading into the recent reporting season and company results being broadly in-line with expectations, the EPS revisions by brokers post-results had the worst ratio of downgrades to upgrades in over 10 years[1].

Martin Currie Australia’s Chief Investment Officer, Reece Birtles notes: “The ‘green shoots’ post the election, lending relaxation by APRA, and tax cuts help lifted consumer sentiment and spending. Numerous global central banks, including Australia, also cut interest rates which has helped put cash in consumer’s pockets and liquidity into the system.”

“While it was understandable that the market had expected to see weak results due to the ongoing global uncertainty since last reporting season, we believe that the market was expecting a much more optimistic outlook going forward. Instead, managements across the boards talked about ‘air pockets’ in their outlook such as low infrastructure spending and advertising, and the forecasts for the period ahead were very conservative.”

Birtles says that what the poor revisions by brokers and conservative outlook does is mask some of the positive signs and fundamental themes found throughout the results , which are:

  • The consumer spending is better than expected
  • The housing market is stabilising
  • Funding environment is improving, but credit availability issues remain

However:

  • B2B demand is still weak due to lack of government stimulus for businesses
  • Business growth lagging from low housing starts and delays in infrastructure projects
  • Miners boosted by iron supply disruptions, but current high dividend payout ratios are unsustainable
  • Accounting chaos from AASB 15, 16 and 9 changes impacted many company results

Will Baylis, Portfolio Manager who oversees the ESG process for Martin Currie Australia also notes that ESG issues are being treated more seriously by boards.

“While not immediately recognisable as an ESG issue, the AASB 15, 16 and 9 accounting changes were in fact one of the topics we discussed with various Boards given their Governance responsibility for the accounting practices of the firm.

“Ultimately the Board is responsible for whether company accounts are prepared in accordance with AASB standards and provide a true and fair view of the entity’s performance. Therefore, questionable accounting practises raise questions about the judgement and oversight of the board, given accounts are being prepared by management,” says Baylis.

In terms of the outlook for Australian equities, Birtles notes that while economic and financial indicators suggest a growing probability of a global recession, he expects domestically focussed Australian companies to perform relatively better than companies dependent on global growth or impacted by geo-political/macro issues, with the structural growth drivers such as population and employment growth important characteristics.

His overall outlook for the domestic economy remains relatively positive as the fiscal and monetary stimulus will continue to flow through to consumption in 2019 and 2020.

“We view that almost every single asset class and factor globally is fully priced, except for Value. In Australia, valuation levels for the equity market may also be on the fair to high side in aggregate, but this hides a large divergence between premiums for defensive/quality/growth assets vs cyclical/value assets.”

“We see heightened valuation dispersion opportunities within the Australian market and are positioning our portfolios towards more value opportunities, believing any policy response or stabilisation of data will lead to a reversal of high value spreads.”

“While it is difficult to pick exact turning points, this September, we have already begun to see signs of a Value factor rebound in Australia,” says Birtles.

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[1] Past performance is not a guide to future returns. Source: Martin Currie Australia, Factset; as of 31 August 2019. Data for the S&P/ASX 200 Index. Calculated using the weighted average of broker consensus forecasts of each holding – because of this, the returns quoted are estimated figures and are therefore not guaranteed. Revisions: the average change in broker consensus next 12-month (NTM) forecasts after company reported results. Up: upwards revisions to broker consensus next 12-month (NTM) EPS forecasts after company reported results >2%; Down: downward revisions to NTM EPS >-2%.

 

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