Investors should stay focused on durable businesses and rational valuations despite market noise
Martin Conlon
Geopolitical tensions, changing market dynamics and a shift in investor sentiment are reshaping equity markets, according to the Schroders Australian equities team, who identified several key themes emerging from the latest reporting season and macroeconomic environment during a recent adviser webinar.
Head of Australian equities, Martin Conlon, said geopolitical uncertainty, commodity price fluctuations and structural changes in market participation are contributing to heightened volatility.
“There are a number of factors creating uncertainty for investors right now, including geopolitical tensions and movements in oil and commodity prices,” he said.
“At the same time, markets have seen passive and quant money dominate over recent years, which means there are fewer fundamental investors willing to stand against volatile share price movements. That can create additional, and sometimes artificial, volatility.”
Despite the challenging backdrop, Conlon urged investors to remain disciplined and focused on the long-term fundamentals of the companies they invest in.
“Panic is never a good sentiment for investment. If investors are thinking about the sustainable earnings of a company and whether they are paying a sensible price for it, they should generally be OK. The key is to remain rational and focus on fundamentals.”
Reporting season highlights mixed sector outcomes
The latest reporting season revealed stark differences in performance across sectors, with small earnings surprises often triggering outsized share price reactions.
In the resources sector, Justin Helliwell, head of research, Australian equities at Schroders, highlighted a strong result from BHP, driven in part by strategic announcements alongside its earnings release.
The company outlined clearer cost targets for iron ore and provided additional detail around its copper growth pipeline, signalling a more proactive approach to capital allocation and operational transparency.
Meanwhile, the healthcare sector experienced significant volatility, particularly among high-growth companies where valuations remain sensitive to even minor earnings disappointments.
Companies like CSL and Cochlear faced sharp share price declines following small revenue or earnings misses, reflecting the market’s reduced tolerance for companies priced for sustained high growth.
“High-multiple stocks are particularly vulnerable when the growth narrative falters, even slightly,” said Australian equities analyst, Sally Warneford.
“The market reaction to small disappointments has been extremely severe.”
However, some healthcare providers, including Ramsay Health Care and Sonic Healthcare, benefited from signs of improving margins following a period of cost pressures linked to wage inflation and post-pandemic activity disruptions.
Banks and housing demand remain resilient
One of the most surprising outcomes from reporting season was the continued strength of Australia’s banking sector, particularly given the higher interest rate environment.
Banks delivered strong results overall, with housing credit growth remaining robust despite concerns that higher rates would slow borrowing.
“It was a pretty solid result from CBA where we’re used to pretty solid results. But whether there was anything there to say, a 20 per cent rise in the CBA share price, it’s a little bit difficult to fathom why,” said Conlon.
“The bank sector is still as strong as housing credit growth is. We’re still seeing five to six per cent compound growth in housing credit in an already highly leveraged Australian economy. The question many investors are asking is where this demand is coming from, and when will it eventually slow.”
Despite expectations that higher interest rates would lead to rising bad debts, Conlon flagged that reporting season showed little evidence of credit deterioration.
Copper demand supported by electrification, but risks remain
In commodities markets, copper continues to attract significant attention due to its central role in electrification, renewable energy and data centre infrastructure.
However, analysts cautioned that while long-term demand growth is positive, current market expectations may be overly optimistic.
“Electrification is clearly a structural tailwind for copper demand,” said Helliwell.
“But when you look at the numbers more closely, demand growth is likely to average around two per cent per year. That’s solid, but not the exponential growth that some market narratives suggest.”
Helliwell also noted that supply dynamics remain critical in determining long-term commodity prices, and new projects could ultimately balance demand growth over time.
Durable businesses favoured more than short-term growth
Across sectors, the consensus was the importance of investing in durable businesses with sustainable earnings, rather than chasing short-term growth or popular narratives.
High-quality companies with strong balance sheets, cash flows and long-term relevance were seen as better positioned in the current environment.
“In uncertain markets, durability matters more than short-term growth,” Conlon said.
“The key question investors should always ask is whether a business will still be strong and relevant in 20 years’ time.”
He added that investors should remain cautious about highly leveraged companies or businesses dependent on optimistic growth assumptions.
“Ultimately, it’s about owning companies with strong balance sheets, sensible valuations and earnings that can stand the test of time.”
