Reece Birtles

Although a consensus ‘Goldilocks’ view prevails for Australia’s economy, analysis of the latest reporting season reveals that a hard landing is still a very real possibility, according to Reece Birtles, chief investment officer at Martin Currie Australia.

Commenting in the bi-annual reporting season paper Birtles says “After digesting the latest information from reporting season results and company meetings our analysis of the data and management commentary is that there is more pain ahead, and the path is edging closer to a hard landing,”

“The deteriorating state of the consumer, flatlining retail sales and falling company cashflows are the biggest risks to the downside. And the relief that things were ‘not as bad as feared’ has masked the extent of this deterioration,” he says.

It’s important to realise that at 1.5 per cent per annum, Australia’s real GDP in 2023 was the third worst annual reading in 30 years, worse even than during the GFC, but ahead of the 2020’s Covid and 2000 post-tech bubble.

The biggest clue on the direction of consumer health and spending, and therefore the economy, is the savings rate. While consumers had excess savings through Covid and were able to build up a buffer, the savings rate is now almost negative as people are eating into these buffers due to higher rates and prices.

“With these buffers almost gone, the real stress is now likely to show which will also reveal itself in falling cash flows for companies,” Birtle says.

This environment will be favourable for Australian stocks with defensive earnings, robust cash flows, strong balance sheets and cost control in sectors like Telcos, Healthcare, Insurance and Infrastructure.

“For some time, we had positioned our portfolios for the hard landing scenario. We have lowered the beta of our portfolios and are focused on companies that can grow earnings and dividends and have lower valuation risk,” notes Birtles.

“Medibank Private is a good example of this, with earnings stability and resilience from a superior industry position, light capital intensity and high cash flow resulting in consistently strong profit margins. We think that defensive inflation protection or stagflation protection is going to be quite important in a hard or soft landing scenario.

“Stocks like Telstra Group, an essential service, and Aurizon Holdings excel in that protection with very resilient volumes and good pricing power, and in the case of Aurizon, inflation-linked returns.

“Under a no-landing, stronger for longer growth theme with higher rates, exposures to insurance stocks such as QBE Insurance Group and Suncorp Group do offer positive leverage.

“In all scenarios we also want to own names such as Worley, which we think has a compelling exposure to the energy transition, with 80% of their new business now in sustainability-type work in resources.”

Reece adds “Importantly, our views are formed not just from crunching the numbers released by companies during reporting season but from real engagement with executives on the ground.

“Over the four-week reporting period, our investment team conducted more than 100 meetings with company management teams following the release of results, and this on-the-ground research has helped us to refine our investment views and outlook.

“In summary, we believe that now is the time for investors to evaluate the balance in their portfolios. It is important for investors to be discerning in their stock picking and focus on the companies which have pricing power, resilient volumes, and capacity to manage margins, while avoiding stocks with valuation risk.”

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