Scott kelly
Following the Federal Reserve’s interest rate pivot last year, the S&P/ASX 200 Industrials Index has surged over 20% over the past four months, ending February 2024 with a 12-month forward PE of around 19 times, well above the long-term average, notes DNR Capital, a leading Australian equities investment manager.
In a recent update, Scott Kelly, Portfolio Manager for DNR Capital’s Australian Equities Income Strategy, says “However investors seeking income from ASX listed companies should look closely at a few factors.
“Investor optimism for the ‘Goldilocks’ scenario of soft landing and low interest rates has seen defensives lag over that market rally. Traditional defensive stocks like Amcor (ASX: AMC), Endeavor (ASX: EDV), The Lottery Corporation (ASX: TLC) and Telstra (TLS) have underperformed in our portfolio over this period despite no real fundamental change in operating performance or investment thesis.”
Additionally, Kelly highlights the outperformance of banks, which has been a headwind for the strategy’s double-digit underweight position.
“Despite concerns such as falling net interest margins and rising mortgage delinquencies, banks have traded at all-time high over CBA’s 22 times 12-month forward PE. We remain comfortable with our underweight position in the big four banks and that really represents our non-holding in CBA which is due to valuation. Our preferred bank remains NAB.”
Kelly notes the impact of falling bond yields, which has favored long-duration and growth stocks, sectors the strategy is underweight in. “The current market pricing reflects a Goldilocks scenario, leaving us cautious due to the narrow path of outcomes being priced in,” he says. “We believe market multiples are stretched and vulnerable to compression, especially given the uncertainties in the global landscape.”
“We are concerned that equity markets have become overly optimistic, leaving market multiples stretched and vulnerable to compression, especially in a year where we think investors need compensation for these risks.
“We continue to add resilient quality companies that have underperformed the market despite delivering operationally good results and presenting good value as we believe in risk reward metrics.
“Companies like Auckland Airport (ASX: AIA), Qube Logistics (ASX: QUB), Scentre Group (ASX: SCG) and The Lottery Corporation are a few examples of resilient quality companies that we expect will deliver regardless of the economic environment overall.
“We remain comfortable with a defensive tilt, particularly given market expectations and the overlay of the macro and geopolitical environment. We are also conscious that income seeking investors are typically retirees and vulnerable to sequencing risk at this point in the market cycle.
“In terms of the dividend outlook for 2024, we think balance sheets of companies remain under geared relative to history and with the market seemingly more confident that the interest rate cycle has peaked, we think the market will start to see more capital management initiatives.
“Payout ratios are also still well below pre pandemic levels, which should allow the corporates to gain greater confidence to return cash to shareholders.
“The DNR Capital Income Strategy is well positioned to deliver a gross dividend yield for calendar year 2024 of over 5%,” says Kelly.
