Matt Griffin

The latest reporting season showed some small cap companies are under pressure – including retailers – while others have a rosier outlook, such as gold miners, according to Phillip Hudak and Matt Griffin, co-portfolio managers of the Maple-Brown Abbott Australian Small Companies fund.

They said retailers’ margins might continue to shrink in 2025, even though retail sales are holding up in Australia.

“Margins are under pressure and while retail sales are holding up, retailers are discounting prices to attract consumers who are reluctant to spend as cost-of-living pressures mount, reducing their margins. We have seen this is the case for listed retailers such as Myers and Adairs in the February reporting season,” Mr Hudak said.

“We’ve also seen more small caps downgrade earnings and earning per share (EPS) forecasts than upgrades, so there is some pressure being felt across the share market more broadly,” he said.

Looking ahead into 2025, the banks, which comprise nearly a quarter of the Australian equity market, are unlikely to provide substantial market support in 2025 due to limited earnings growth and full valuations. 

“Interest rate cuts generally aren’t good for bank earnings, and with a mixed set of results from earnings season, this could be a big headwind for the ASX100 over the coming year, given how large the banks are as a percentage of the Australian index. Couple this with insurers who are very well owned by large cap managers, in an environment where the premium rate cycle is turning negative, this could support our thesis of small caps catching up some of the underperformance over recent years,” Mr Griffin said.

In addition, merger and acquisitions (M&A) activity is boosting some small caps, including Domain and Mayne Pharma.  Maple-Brown Abbott expects more M&A activity in 2025, with the lower Australian dollar making local assets cheaper for offshore buyers, and cash heavy private equity groups circling local companies.

“Private equity money is chasing undervalued stocks in the small cap space, and so we are seeing increasing M&A activity,” said Mr Hudak.

“In recent times, Insignia shares have rallied amid an intensifying bidding war between private equity firms CC Capital, Bain Capital and Brookfield and we have also seen takeover bid for Domain, which was a top performer this reporting season, from US giant CoStar,” Mr Hudak said.

“Another example is private equity-backed US pharmaceutical giant Cosette making a takeover bid for Mayne Pharma Group, and we believe that we will see a greater level of corporate activity going forward in 2025,” he said.

Greater M&A activity could also support the gold sector into 2025, with higher gold prices triggering greater activity. In terms of other sectors, the first half of the 2025 calendar year is expected to be mixed given the upcoming Federal election, which must be held by May 2025. 

“We expect cost-of-living measures and fiscal spending to continue which should be supportive for the aged care and childcare sectors,” Mr Hudak said.

The post Retailers report shrinking margins in reporting season, gold to bounce back appeared first on AdviserVoice.

Justin Lannen

With significant potential for geopolitical and economic uncertainty in 2025, defensive essential service assets such as infrastructure are well positioned, according to Justin Lannen, portfolio manager in the global listed infrastructure team at Maple-Brown Abbott.

“Despite the geopolitical turmoil, we remain optimistic about 2025 and believe that the outlook for defensive, essential service assets such as infrastructure remains strong, especially when compared to more economically sensitive asset classes should economic demand weaken.

“The actions of central banks in 2024 was largely driven by the evolving economic outlook across different regions, and in response a rate cutting cycle started. However, we are hesitant about whether central banks will make further material reductions in 2025 due to ongoing economic strength.

“Our long-term assumptions with interest rates remain approximately in line with current market rates. If central banks do make further reductions, any decline in real long-term interest rates would provide relief for the infrastructure sector.

“Lower rates could further support the sector, enhancing its appeal as an investment and contributing to the stability of infrastructure-related assets,” says Mr Lannen.

Inflation looks to be on the decline globally, however Mr Lannen doesn’t expect it to return to pre-COVID levels in 2025 and continues to see value in the embedded inflation pass- through mechanisms within infrastructure regulations and contracts.

“These features provide a degree of protection against inflationary pressures, ensuring that infrastructure remains an attractive asset class in a potentially volatile macroeconomic environment.”

Mr Lannen says the fund continues to favour monopolistic infrastructure assets that are trading at attractive discounts to internal valuations, protected by regulation and strong contracts with inflation linkage and growth being driven by capital expenditure requirements.

“We see substantial organic growth opportunities for global listed infrastructure, predominantly driven by the energy transition but also supported by themes such as water, transport mobility and digitalisation.

“Cell towers remain a large allocation in our fund. We think cell towers are a strategic and forward-looking investment opportunity for 2025. The convergence of technological advancements, surging data consumption, and the sector’s inherently defensive earnings profile, create a strong foundation for future growth. As connectivity becomes ever more integral to modern life, cell towers are well-positioned to capitalise on the expanding demand for communications infrastructure.

“Water utilities are another sector that we are favourable about especially assets in the UK. The close of 2024 brought a significant event for the UK water sector with OFWAT’s regulatory price review and final determination for the 2025-30 period. This regulatory decision marks a significant milestone, offering much-needed clarity for the industry.

“There will be a large increase in capital expenditure over the coming five years to improve the operating and environmental performance of most UK water companies. Allowed sector expenditure (opex and capex) is increasing from £61bn to £104bn over the five-year period to 2030.

“Companies like Severn Trent and United Utilities are well positioned for the upcoming regulatory period,” he says.

Large amounts of capital continue to be invested by infrastructure companies to facilitate mega themes including decarbonisation, digitalisation, water quality and transportation, says Mr Lannen.

“Substantial long-term capital is needed to support investments in the world’s infrastructure networks and to support these mega themes.

“The geopolitical and macroeconomic landscape for 2025 presents much to consider, and stability is unlikely. However, we believe global listed infrastructure is an asset class that investors can find inflation-linked cash flows and attractive rates of return.”

The post Global listed infrastructure well positioned in 2025 for inflation-linked cash flows and attractive rates of return appeared first on AdviserVoice.

Matt Griffin

The Australia dollar is a key factor that markets have yet to price in and will need to be closely watched this earnings season, according to co-portfolio manager of the Australian Smaller Companies fund at Maple-Brown Abbott, Matt Griffin.

Over the last quarter the Australian dollar is down 9 per cent, around 6c, to the US dollar, which Mr Griffin says is not reflected in consensus numbers for a majority of stocks.

“Sell-side estimates always become a bit stale at the start of the year, as analysts haven’t updated their number for several weeks during the holiday season. As a result, consensus is still using 67-68 cents in a lot of their assumptions.

“For retailers and importers that purchase goods in foreign currency, the readjustment to a lower Australian dollar will take about 6 to 12 months to flow through to cost of goods sold, given currency hedging in place. These companies will need to put through a material price rise to offset the currency impact, but this will be particularly difficult in the current environment given the cost-of-living pressures. It will be something to watch this earning season.

“On the other hand, for companies with offshore operations, such as US tech companies like Pro Medicus (ASX:PME) and Life360 (ASX:360), we would expect to see earnings upgrades in AUD terms as they benefit from the strong US dollar.”

Mr Griffin says Australian gold miners are also likely to benefit from the currency moves.

“The Australian gold price is now over A$4000 per ounce, meaning there is plenty of margin for domestic miners. However even with the rise in gold prices, specific stock selection is essential,” says Mr Griffin.

The depreciation of the Australian dollar will also be a positive for potential mergers and acquisitions from offshore players.

“For a US private equity firm or corporate acquirer, the valuation of companies in Australia is now 10 per cent cheaper than it was last quarter, so we expect more M&A activity this year. A great example of this is the bidding war over Insignia Financial,” says Mr Griffin.

Apart from potential currency headwinds, Mr Griffin says he is relatively downbeat on the retail market.

“The feedback we have so far from retailers is that the top line is holding out. However, having a stable or slightly increased topline hasn’t offset margin factors, which has been driven by discounting over the past several months, coupled with wage and rent rises.

“Overall, we think the market is too optimistic on margins for many retailers this reporting season. We have seen Premier (ASX:PMV) and Myer (ASX:MYR) this month have big earnings downgrades, despite revenue holding up reasonably well. We are expecting some downside margin surprise from some retailers this earnings season, but again it will be down to those stock specific stories,” says Mr Griffin.

The smaller end of the financials sector is where Mr Griffin is optimistic.

“A number of the smaller financial companies have exposure to the US market, where the consumer is in good shape. Any easing of inflation and interest rate cuts should bolster consumer demand for credit, and lower funding costs.

“One of our key picks in this sector is ZIP (ASX:ZIP). With buy-now-pay-later segment still in its early stages in the US compared to Australia, there is potential for earnings upgrade over the course of the year. ZIP is already making good gains in terms of merchants in the US market, and we expect them to grow the number of active customers as well. This, coupled, with the general positive consumer financial health in the US, suggests positive tailwinds for ZIP in the year ahead.

“Judo Financial (ASX:JDO) is another key pick for us in the financials sector this earnings season. It is a challenger bank that is taking on the big four in the business banking segment, and has already hired some of the top business bankers from its competitors. It’s done a great job getting the right mix for loan book growth, credit risk and funding costs,” he says.

“We are expecting hits and misses by sectors this reporting season, but ultimately it will come down to those stock specific stories and how companies are mitigating potential headwinds heading into 2025.”

The post Depreciation of the Australian dollar a key factor to watch this earnings season appeared first on AdviserVoice.

Phillip Hudak

The higher gold price has boosted margins for gold miners who likely have further to run, while cost-of-living pressures make retailers more risky investments, according to Phillip Hudak and Matt Griffin, co-portfolio managers of the Maple-Brown Abbott Australian Small Companies fund.

Following the recent earnings season, Mr Hudak says there are good opportunities in select gold companies.

“The gold price has done very well over the past two years, despite rising real bond yields which are normally not good for gold. However the impact of bond yields has been offset by high levels of central bank buying and we see value emerging for gold producers,” he said.

“Those companies that are producing gold right now, such as Perseus and Genesis Minerals, and can take advantage of the “scarcity value”, have outperformed the gold price.  Combined with easing cost inflation, profits have been boosted.

“This contrasts to gold developers, which have underperformed the gold price, as they are seeing higher funding costs, project cost blowouts and delays,” said Mr Hudak.

The US dollar gold price is currently trading near all-time levels at US$2,500/oz, having risen over 20 per cent year-to-date.

“We believe there is still significant upside in select gold companies, especially those companies that are increasing their resource base and have low-cost options to bring gold production on, including Spartan Resources, as well as those developers that have high-quality well-funded projects, such as De Grey Mining,” said Mr Hudak.

Source: Bullion Vault, www.bullionvault.com/gold-news/infographics/olympic-medals-real-gold-silver-bronze-medal-count, MBA, FactSet, 23 August 2024. gold producers include CMM, EMR, GMD, GOR, PRU, RED, RMS, RRL, RSG, WAF and WGX, gold developers include BGL, DEG and PDI.

Greater merger and acquisition (M&A) activity is likely to continue in the gold sector into 2025, with higher gold prices triggering greater activity. With exploration activity still limited, this has led to a depletion of gold reserve, helping to boost margins for producers. Coupled with a lengthening and less certain permitting process for new mines, this is causing producers to pursue a ‘buy over build’ strategy to growth.

“Gold sector M&A activity is heating up, for both global and local small cap gold miners,” Mr Hudak said.

“It is now becoming cheaper to buy gold miners rather than build gold mines. We’ve seen Newmont and Newcrest get together, Goldfields has been active and that has flowed through to Australian small cap gold companies, including Ramelius taking a stake in Spartan, Perseus taking a stake in Predictive Discoveries, and Red 5 and Silverlake Resources merging.

“We believe this M&A activity will continue, particularly at the smaller end of the market.

“We also liked the aged-care sector, which has benefited from increased government funding in areas like wages. On top of that, the government is supplementing growth of labour,” Mr Hudak said.

Matt Griffin, co-portfolio manager of the Australian Small Companies fund, said other companies they like includes storage real estate investment trusts (REITs), with the ageing population and housing turnover driving demand for greater storage.

In contrast, other REITs such as industrial and office have seen valuations decline and are trading at significant discounts to Net Tangible Assets (NTA), especially office and industrial REITs, while gearing levels are rising.

According to Mr Griffin, the market is implying valuations are not at the bottom yet, and earnings growth will be very hard to come by for the majority of small cap REITs in FY25.

“The one bright spot we see is storage, with structural factors driving a more favourable outlook than other REITs, with downsizing, an ageing population and housing turnover driving demand for storage space, and storage REITs have a strong pipeline of growth,” said Mr Griffin.

The post Opportunities in gold producers as well as more M&A activity likely appeared first on AdviserVoice.

Georgia Hall

The exponential growth of data centers raises critical questions about electricity sourcing and the infrastructure investment needed to support digitalisation and decarbonisation. According to Maple-Brown Abbott, insatiable demand for data centers is creating attractive investment opportunities in the US power sector where one third of the world’s data centers are situated.

“We are positive on the US electric utilities sector because of compelling valuations coupled with emerging opportunities around data center growth, digitalisation and decarbonisation” says Georgia Hall, ESG Analyst, Global Listed Infrastructure at Maple-Brown Abbott.

“Data centers form the backbone of the digitalised world, supporting various services from cloud computing to e-commerce and artificial intelligence – but they are voracious consumers of electricity. According to the Electricity 2024 report by IEA, estimates suggest global power demand from data centers could surpass 1,000 terrawatts per hour (TWhs) by 2026 – roughly the equivalent of Japan’s entire electricity consumption. While data centers are driving electricity consumption to unprecedented levels, we also believe their growth is helping to accelerate energy transition infrastructure investments.

“Data center growth presents a major opportunity for regulated electric utilities to expand their customer base and revenue streams while spreading the energy transition costs across more consumers. This is especially true in the US, where landmark policy incentives such as the Inflation Reduction Act are turbocharging investments in renewables and grid infrastructure.

“We believe underappreciated structural growth tailwinds will persist for decades to come but are not yet reflected in the market prices for these assets. Our current allocation of 37 per cent to US electric and multi-utilities in the Maple-Brown Abbott Global Listed Infrastructure strategy reflects our conviction in the sector,” Ms Hall said.

‘Hyperscalers’ such as Amazon, Apple, Alphabet, Meta and Microsoft all have zero carbon or 100 per cent renewable commitments and rely heavily on data centers as part of their core business. According to research by S&P Global Market Intelligence, these five companies alone account for over 45GW of corporate renewable purchases worldwide – more than half of the global corporate renewables market.

“Grid capacity is critical not only for the decarbonisation of the transport, industrial and residential sectors – but also for data center interconnection. Integrating large quantities of variable solar and wind generation, whose peak output may not match moments of peak demand, requires significant investment and the sophisticated management of electrical grids. Hence, the timing of grid investment has never been more important.

The long lead time of grid planning versus the shorter timeframe to plan and build data centers creates a potential shortfall of capacity, thereby placing pressure on utilities and regulators to accelerate investments.” Ms Hall said.

The recent energy crisis in Europe and the ongoing need for zero carbon baseload power to complement renewables has re-ignited the debate around nuclear power, especially in the context of data centers.

“It is reasonable to assume that greenfield large and smaller-scale nuclear power plants are unlikely to solve the near-term need for load growth. However, existing nuclear fleets with spare capacity have potential to assist hyperscalers with their electricity and zero carbon needs.

“That said, not all nuclear plants have this optionality. Nuclear power could solve for some, but not all, data centers’ electricity needs. Therefore, more creative solutions are needed for pairing renewables with baseload and/or energy storage technologies, where viable. Much of this comes down to technology and project development timelines, having the right policy incentives and ensuring bill affordability,” she said.

The post Maple-Brown Abbott sees strong investment opportunities for US listed utilities powering data center growth appeared first on AdviserVoice.

John Moorhead

Several factors point to a stronger year ahead for emerging markets, where select country share market gains could outpace those in the US and other developed nations, says John Moorhead, head of global emerging markets at Maple-Brown Abbott.

These include a likely peak in interest rates, lower inflation and attractive equity valuations, which could see investor capital flow to emerging markets.

Mr Moorhead believes emerging markets are at a turning point after hitting a 35 year low relative to the US share market.

“The last decade was relatively challenging for any market outside the US; the next decade is likely to be better for emerging markets, a number of which are showing higher growth and higher real interest rates than developed nations, suggesting a turn in the cycle could come soon.

“Select emerging markets are well ahead of developed markets in raising interest rates and they are also ahead of the curve in fighting inflation. We think we’ll see capital flows pick up in key markets, which will likely strengthen their currencies and help to lower inflation further. We could potentially then see more rate cuts in emerging markets, which would support local economies, corporate earnings growth and share markets,” he said.

The strength in Latin America and Eastern Europe stands out, where Maple-Brown Abbott believe share markets have some of the greatest potential.

“For instance, while China may appear cheap at 9-times price-to-earnings (P/E), other markets such as Greece trade on less than 5-times price-to-earnings (P/E). More important than valuation alone is the direction of change. Corporate earnings in China continue to disappoint in aggregate. While we are finding some opportunities in China where valuations are cheap and company fundamentals are strong, the overall negative changes leave us cautious on China at a country level.

“Greece, on the other hand, is undergoing a renaissance in terms of its economy and corporate earnings and therefore has one of the highest positive change scores across the universe,” he said.

The chart below shows Maple-Brown Abbott’s preferred emerging market opportunities at the country level based on three distinct criteria: value, quality and change.

Source: Maple-Brown Abbott, April 2024.

Mr Moorhead says while India has generated a lot of attention in the past year, and its corporate and economic fundamentals are strong, this is more than offset by very high share market valuations. Bloomberg consensus data has India’s share market on 23-times next year’s earnings, compared to about 12 times for the broader MSCI emerging markets.

More recently, the Chinese equity market has been supported by a quarterly earnings season that saw an increase in the number of corporates announcing shareholder-friendly capital management policies. Outside Asia, Turkey was a standout market with a 14% gain (USD terms). The market strength was supported by foreign investor inflows as investors are positive on the Government’s pledge to maintain orthodox economic policy.

Mr Moorhead pointed out that emerging markets are idiosyncratic and encompass higher investment risk, so experience, active management and bottom-up research count.

“We can invest across a universe of 3,000 listed companies within a 24 country cohort, with each of those countries going through their own phase of economic development and shorter-term economic cycles. We apply a bottom-up approach and look at individual businesses and industries based on our three key metrics of value, quality and change.

“Focusing on the impact of cyclical and structural change on companies, we use a rigorous and repeatable process to construct a concentrated portfolio which captures the opportunities offered by the dynamic nature of emerging markets,” he said.

The post Positive outlook for emerging markets as domestic growth looks to outpace US appeared first on AdviserVoice.

John Moorhead

Several factors point to a stronger year ahead for emerging markets, where select country share market gains could outpace those in the US and other developed nations, says John Moorhead, head of global emerging markets at Maple-Brown Abbott.

These include a likely peak in interest rates, lower inflation and attractive equity valuations, which could see investor capital flow to emerging markets.

Mr Moorhead believes emerging markets are at a turning point after hitting a 35 year low relative to the US share market.

“The last decade was relatively challenging for any market outside the US; the next decade is likely to be better for emerging markets, a number of which are showing higher growth and higher real interest rates than developed nations, suggesting a turn in the cycle could come soon.

“Select emerging markets are well ahead of developed markets in raising interest rates and they are also ahead of the curve in fighting inflation. We think we’ll see capital flows pick up in key markets, which will likely strengthen their currencies and help to lower inflation further. We could potentially then see more rate cuts in emerging markets, which would support local economies, corporate earnings growth and share markets,” he said.

The strength in Latin America and Eastern Europe stands out, where Maple-Brown Abbott believe share markets have some of the greatest potential.

“For instance, while China may appear cheap at 9-times price-to-earnings (P/E), other markets such as Greece trade on less than 5-times price-to-earnings (P/E). More important than valuation alone is the direction of change. Corporate earnings in China continue to disappoint in aggregate. While we are finding some opportunities in China where valuations are cheap and company fundamentals are strong, the overall negative changes leave us cautious on China at a country level.

“Greece, on the other hand, is undergoing a renaissance in terms of its economy and corporate earnings and therefore has one of the highest positive change scores across the universe,” he said.

The chart below shows Maple-Brown Abbott’s preferred emerging market opportunities at the country level based on three distinct criteria: value, quality and change.

Source: Maple-Brown Abbott, April 2024.

Mr Moorhead says while India has generated a lot of attention in the past year, and its corporate and economic fundamentals are strong, this is more than offset by very high share market valuations. Bloomberg consensus data has India’s share market on 23-times next year’s earnings, compared to about 12 times for the broader MSCI emerging markets.

More recently, the Chinese equity market has been supported by a quarterly earnings season that saw an increase in the number of corporates announcing shareholder-friendly capital management policies. Outside Asia, Turkey was a standout market with a 14% gain (USD terms). The market strength was supported by foreign investor inflows as investors are positive on the Government’s pledge to maintain orthodox economic policy.

Mr Moorhead pointed out that emerging markets are idiosyncratic and encompass higher investment risk, so experience, active management and bottom-up research count.

“We can invest across a universe of 3,000 listed companies within a 24 country cohort, with each of those countries going through their own phase of economic development and shorter-term economic cycles. We apply a bottom-up approach and look at individual businesses and industries based on our three key metrics of value, quality and change.

“Focusing on the impact of cyclical and structural change on companies, we use a rigorous and repeatable process to construct a concentrated portfolio which captures the opportunities offered by the dynamic nature of emerging markets,” he said.

The post Positive outlook for emerging markets as domestic growth looks to outpace US appeared first on AdviserVoice.

Matt Griffin

Boutique investment manager Maple-Brown Abbott believes select Australian small cap gold miners offer attractive valuation and earnings metrics.

Phillip Hudak, co-portfolio manager, Australian small companies at Maple-Brown Abbott, says the Australian small cap gold sector is set to attract increased investor interest given it represents approximately 9 per cent (by market capitalisation) of the S&P/ASX Small Ordinaries Index and has the potential to react positively to the recent increase in gold prices.

Matt Griffin, co-portfolio manager, Australian small companies, adds there is upside potential for companies in the sector that can deliver on production guidance, effectively manage costs and offer significant operating leverage.

“If the gold price remains higher for longer, this has the potential to result in material positive earnings revisions for companies at the smaller end of the Australian gold mining sector,” Mr Griffin said.

The Maple-Brown Abbott small companies team believe some stock valuations look compelling at the current gold spot price and valuations for select producers remain relatively undemanding, particularly in the context of all-time high gold prices.

“Current stock valuations broadly imply gold prices around long-term pricing, which is well below the current spot price. Valuations have held up best for producers with high quality projects, for example Perseus Mining, that continue to deliver production growth, meet cost guidance and build cash reserves,” Mr Hudak said.

The Maple-Brown Abbott small companies team believes Spartan Resources (SPR) is an attractive high-grade, low-cost gold prospect in Western Australia in an increasingly acquisitive local small cap gold market. Genesis Minerals (GMD) is another favoured stock, run by a high quality management team. The company is turning around an underperforming asset base and leveraging other deposits in the Leonora and Laverton regions in Western Australia.

Declining exploration spend and depleting reserves means there is a limited organic growth profile for many gold miners. Given the recent strong gold price and rising producer margins, this promotes merger activity to backfill declining production profiles. In addition, increasing complexity and time taken to permit new projects means it is likely now cheaper and easier to buy versus build.

“We have also seen early-stage explorers continuing to struggle to attract new capital with the number of global junior fund raisings in February 2024 being lower by 33 per cent relative to the previous period last year and the lowest reported since January 2022 which makes them easy targets in the current environment,” Mr Griffin said.

Both the VanEyk Gold Miners and Junior Gold Miners ETFs have materially underperformed the gold price over the past three years, which emphasises how hard delivery from both a production and cost perspective has been. However, select emerging Australian small cap gold developers and producers such as De Grey Mining, Emerald Resources and Genesis Minerals have recently delivered strong returns above the underlying commodity.

“Over the past few years, the smaller end of the Australian gold mining sector has been plagued by higher costs from both a capital and operating perspective given cost inflation pressures and labour constraints, particularly in Western Australia. Our industry channel checks and a review of mining costs across Australian mines point to a stabilisation and even an improvement in mining costs over the past 12 months.

“Our discussions with gold miners indicate labour pressure is easing, validated by the decline in job advertisements in the mining services industry. This has been assisted by the recent closure of nickel and lithium mines given commodity price pressures which is easing mining industry labour constraints,” Mr Hudak said.

The post Maple-Brown Abbott sees opportunities at the smaller end of the Australian gold mining sector appeared first on AdviserVoice.

Dougal Maple-Brown

Viewpoint

• After bottoming in mid 2023, the Banks have outperformed the market by around 20%^[1].
• We have favoured the Banks over the past year, more off the back of reasonable valuations, rather than particularly exciting earnings growth.
• The recent re-rating of the Banks has seen us trim our positions, however the Bank sector still looks reasonably attractive relative to Industrials.

Any way you cut it; the Banks have had a pretty good run. After bottoming in mid 2023, the Banks have outperformed the market by around 20%^[1] and if anything that outperformance has accelerated into the first few months of this year. The reasons for that outperformance aren’t overly clear: only CBA reported full financial results in the recent February reporting season and those results were pretty underwhelming. At a pre provision profit level CBA actually missed consensus expectations, with the bottom line result saved in our view by a low credit charge.

There have been some reports of foreign buying of the Banks, particularly by Asian investors searching for ‘anything but China’. You can see why big, liquid Aussie Banks fit the bill here, particularly given Australian Resource stocks are generally considered a leveraged play on China.

Over the past year our portfolios have held overweight positions in ANZ, NAB and Westpac. Our thesis over this period was premised on sensible earnings forecasts and reasonable valuations, particularly when compared to many Industrial stocks. At the time we (and consensus) were forecasting lacklustre credit growth, ongoing Net Interest Margin (NIM) compression, growing costs and a modest credit cycle. Not surprisingly, those assumptions drove limited earnings growth and hence forecast total return was largely limited to the grossed-up dividend yield.

While that earnings profile didn’t look very exciting, in our view valuations were very reasonable. A year ago ANZ and Westpac were trading around book value or 10x forward earnings. On a bad day they even traded below book! NAB was slightly more expensive, but still well below the premium rating enjoyed by CBA.

Finally, market sentiment towards the Banks was terrible. This peaked after the May 2023 Bank ‘Reporting Season’ when NIMs were being crushed in the midst of a mortgage pricing war. Brokers were universally bearish and even Bank management teams we saw at the time were quite concerned.

Yet less than a year later, Banks have handsomely outperformed the broader market^[1]. As always, our job is to judge the stocks on what we see before us. Frankly, we believe earnings still look pretty sensible and yes still pretty unexciting. What has changed is the rating. The chart below from Goldman Sachs suggests the Banks are now trading on a P/E of around 16x – a 35 year high. Furthermore, Goldmans also make the point that historically P/Es have expanded when earnings are depressed. Earnings today for the Banks seem pretty close to ‘normal’ – as far as such a concept exists for Banks!

Source: Goldman Sachs, date to March 2024.

So where does that leave us on Banks?

We have been trimming our Bank positions as valuations have become less attractive. The speed of our selling is of course also influenced by other buying opportunities. It is here the story gets more complicated, given Industrials (ex Financials) as a whole still trade at a full ~25x forward earnings^[2]. Thus, relative to Industrials, Banks are closer to fair value rather than outright expensive.

Source: Goldman Sachs, data to March 2024.

Parting thought

The Big Four remain a strong pillar of the Australian economy and make up over 20% of our equity market. While arguably less strategic levers exist for bank boards than did five years ago, we continue to focus on the challenges facing the banking sector, earnings outlook and valuations as share price drivers. As a value-based active manager we will adjust our exposure to the Banks as valuations dictate, just as we have over the last year.

By Dougal Maple-Brown, Head of Australian Value Equities

———-

Notes:
[1] Performance of S&P  ASX Bank industry group versus S&P/ASX 300 Total Return Index for the year to 29 February 2024.
[2] Maple-Brown Abbott as at 14 March 2024

The post A good recent run for the Big Four banks, but where to next? appeared first on AdviserVoice.

Ms Metcalfe joins from Schroders where she was a business development account manager. Prior to this she was partnerships manager with Livewire Markets. She also spent six years at Fidelity International in the UK and Sydney in account management and marketing roles. Prior to this she worked with Perpetual and Anittel in marketing and events roles.

Mr Srinivasan says Ms Metcalfe brings to the role over a decade’s worth of experience in marketing and distribution across a broad range of financial service enterprises.

“Sophie has strong technical knowledge and a good understanding of the needs of financial advisers. These strong links, and her reputation for delivering outstanding service to the financial advice community, make her an excellent choice for the role,” Mr Srinivasan said.

In her new role, Ms Metcalfe will work with Mr Srinivasan and the broader distribution team to cultivate strong relationships with advisers across the country and in so doing, increase awareness of Maple-Brown Abbott’s capabilities across asset classes. 

“Sophie’s work with the Schroders Investment Education Community in particular demonstrates her ability to communicate and work with financial advisers by delivering valuable insights,” Mr Srinivasan said.

Ms Metcalfe has a Bachelor of Commerce, Management & Business Law from the University of Technology, Sydney.

She commenced with Maple-Brown Abbott on 18 March.

The post Maple-Brown Abbott appoints new business development manager appeared first on AdviserVoice.