Hamish Tadgell

Australian equities are heading into the February reporting season with improving earnings momentum, driven by strength in the resources sector and a more supportive macro backdrop, according to Hamish Tadgell, portfolio manager at SG Hiscock.

Tadgell said expectations for FY26 earnings growth have lifted meaningfully since AGM season, underpinned by a surge in commodity prices and upgrades across the resources sector.

“We expect reporting season to be relatively resilient, supported by improving cyclical conditions and generally conservative guidance,” said Tadgell.

“Earnings growth into 2026 has improved materially, with resources now accounting for around two-thirds of expected market earnings per share (EPS) growth in FY26. Resources earnings growth is running at around 15 per cent, and we expect the positive trends around commodity pricing and currency support to flow through to results.”

While the overall outlook is constructive, Tadgell said cost pressures will remain a key theme, particularly for companies with limited pricing power.

“Rising wages, energy and input costs continue to challenge margins,” he said. “We’re already seeing this play out in the consumer discretionary sector, where companies such as Super Retail Group (SUL), JB Hi-Fi (JBH), ARB Corporation (ARB) and Temple & Webster (TPW) have the need for higher promotional activity and discounting stimulate demand and drive sales.”

Tadgell expects volatility around individual stock results to remain pronounced, particularly among quality growth names that have experienced valuation sell-offs.

“Given the de-rating we’ve seen across many quality growth stocks, there is potential for outsized moves this reporting season if companies can demonstrate that underlying business fundamentals remain intact,” he said.

“That said, we continue to think the valuation derate we have seen around the technology sector and concerns around return on AI investment could weigh on sentiment towards the sector in the near term.

“History shows that even when disruptive technologies are transformative and the longer trend is only going to be one way, like we have seen with digital classified advertising, online retailing and more recently obesity drugs, when the initial euphoria gives way to focusing on cashflows and returns its not unusual to see a hiccup or period of consolidation for a while.”

Management commentary is also expected to be closely scrutinised, with many companies entering reporting season under new leadership.

“There has been an unusually high level of CEO turnover over the past six months,” Hamish notes. “For companies like Carsales.com (CAR), REA Group (REA), Treasury Wine Estates (TWE), Endeavour Group (EDV), Domino’s Pizza Enterprises (DMP), Rio Tinto (RIO) and South32 (S32), this will be an important opportunity for new CEOs to set direction and reset expectations.”

Capital management may prove another key differentiator, with the market’s dividend yield sitting at around 3.2 per cent, below long-term averages.

“Companies that can surprise positively on dividends or capital management initiatives are likely to be rewarded in this environment,” he said.

From a sector perspective, Tadgell expects most resource companies to report solid results, supported by resilient commodity prices, a weaker Australian dollar and generally positive demand conditions. He highlighted aluminium and copper producers as particularly well positioned, given supply-side constraints and structural growth drivers.

Selective opportunities are also emerging in quality growth stocks following sharp valuation retracements.

“While some names still look expensive, we’re starting to see more attractive opportunities where valuations better reflect growth prospects,” he said. “We prefer companies trading on more reasonable multiples and with strong price-to-growth characteristics, including ResMed (RMD), Aristocrat Leisure (ALL) and Light & Wonder (LNW).”

Tadgell also highlighted Australian classifieds businesses as relatively well positioned to manage AI-related disruption.

“These businesses benefit from strong customer franchises, high levels of organic traffic and vertical specialisation,” he said. “Following recent de-ratings, Seek (SEK) remains preferred, with the potential for an inflection in volume growth alongside improved yield from dynamic pricing.”

Looking ahead, Tadgell believes the broader market backdrop remains supportive, despite ongoing risks around interest rates and bond yields.

“While macro factors, particularly monetary policy and any move by the Reserve Bank to increase rates in February can still overshadow results, we believe the environment is becoming more conducive for earnings delivery and broader market participation.”

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Hamish Tadgell

The August reporting season has seen stark share price volatility with moves setting new records, according to portfolio manager at SG Hiscock & Company, Hamish Tadgell. Around 63 per cent of stocks in the ASX300 have seen price moves of five per cent or more in both directions, and a third price moves greater than 10 per cent, with small caps faring better than their larger peers.

“Overall results have been a mixed bag this reporting season. Underlying growth has slowed and the impact of greater regulation, tariffs, and inflation has led to higher costs of doing business for many companies, creating a challenging operating environment.

“Most companies are having to work harder to manage margins, and the ability to pull on price is becoming increasingly difficult as the cost of living pressures have become more pronounced. This is evident in the more cautious tone we are seeing around revenue growth and guidance for many companies, and growing focus on cost out and restructuring. This is seeing companies that are growing strongly rewarded, and in many cases trading on elevated multiples,” says Mr Tadgell.

The share price volatility experienced this reporting season has been more extreme in larger cap companies where price reactions to results from the likes of James Hardie, AGL, CSL, Sonic Healthcare, Woolworths and Amcor have been extreme.

“In general, small caps have outperformed large caps given better growth prospects and are benefiting from expectations for further rate cuts. This has been most pronounced in the discretionary retail, REITs and resources, particularly gold names,” Mr Tadgell says.

“It seems the market is taking a more black and white view on results day. The weight of money being driven by passive, quant and structured products seems to be creating a more binary view on whether results are good or bad, amplifying the moves and often ignoring the nuance. While this can be frustrating, rarely are the outsized moves as good or bad as share prices are implying, creating long term opportunities for those prepared to focus on the fundamentals,” he says.

The biggest surprise this reporting season for Mr Tadgell has been from CSL. “Once again CSL did not deliver against expectations with a low-quality result beat driven by lower R&D and tax expenses, and soft guidance in its Behring plasma business. This, coupled with management’s decision to embark on major structural changes, including a cost-out/restructure and plans to spin off its Seqirus flu business, has raised questions around the pathway and timing of the recovery.

“Fundamentally, the share price move looks overdone, but the result has raised a number of new questions that will require execution and evidence to instil greater confidence and recovery,” he says.

He adds that several themes emerged from this reporting season. Results have shown a slight increase in confidence in the domestic economy, with evidence that consumer confidence is stabilising and improving following the Reserve Bank of Australia’s rate cut in May. However, US tariffs are impacting US exposed stocks.

“A number of retailers and REITs have highlighted a discernible improvement in trading activity since June and into August. Baby Bunting, REA Group, JB HiFi, Coles and some apparel names which surprised positively on volumes, indicating that households are willing to spend selectively when value or necessity is clear.

“REIT results are also pointing to some improving signs of life in parts of the property market. Stockland, Mirvac and Charter Hall highlighted increased property inquiry with interest rate cuts and signs of property values stabilising. However, this doesn’t appear to be flowing through to new starts and building materials and construction sectors yet.

“Reliance Worldwide, Reece and Boral all highlighted that market conditions remain sluggish and broader demand pressures persist. Geographically this is more pronounced in Victoria where confidence seems lower and there are additional structural concerns around higher taxes and regulation.

“US exposed building material and packaging results highlighted a discernible weakening in the US economy and challenging trading conditions. It is clear the US housing market activity for both new builds and remodelling work continues to deteriorate with US tariff volatility and policy uncertainty weighing on household and business confidence,” says Mr Tadgell.

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Hamish Tadgell

As economic conditions tighten throughout the second half of 2023, the implications of higher interest rates will start to emerge with equities investors needing to be active and selective, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.

“Over the last year, we have seen a decoupling of activity indicators and financial conditions. The market has been incredibly resilient in the face of monetary tightening. Higher rates have been subverted by COVID savings, higher rates for savers and tight labour markets.

“In the last few months market sentiment has also improved sharply on the AI euphoria and hope of a soft landing,” he said.

Mr Tadgell said he expects headline inflation to decline further over coming months. Without much of an increase in unemployment growth, this could see economic growth continue to be more resilient and supportive for equities.

“However, the issue of inflation is far from over given the persistence of services led-inflation. It also needs to be recognised that wage increases tend to be stickier than prices, and falling price inflation could boost real wage growth, boosting consumption and causing inflation to be persistent.

“This raises the risk central banks will have to do more in taming inflation and means inflation and rates are likely to remain front and centre for markets for some time yet,” he said.

Mr Tadgell said the impact of higher rates is going to be uneven across the economy and also at a sector-level. He believes financial conditions are tightening and it will feel like a recession in some parts of the economy even if the broader economy doesn’t officially go into recession.

“We are seeing stress in the housing and discretionary consumer-facing sectors which we expect this to broaden out and carry downside risk to earnings.

“This all points to a relatively uncertain outlook and a need to be active and more selective in navigating markets.

“At a more fundamental stock level, there is risk of overestimating recent revenue growth trends for many companies. Inflation has seen an increase in most company’s top line as they’ve increased prices. As inflation falls, it will become harder to push through prices. This will see a slowdown in sales and margins unless costs are pulled or there’s productivity gains,” he said.

Amid a more cautious environment, he said it is natural for equities investors to assume a flight to safety, including to more liquid, larger cap companies. However, he said this doesn’t necessarily mean blue chip companies will be the beneficiaries of a shift in attitudes.

“It’s too simplistic to say blue chips will benefit from the uncertainty. It’s about focusing on the fundamental drivers and value. Which companies have pricing power, secular tailwinds and competitive advantage and position to navigate this environment? Balance sheet strength is the other thing that’s critical in tougher times and when rates are increasing as they are, it becomes even more pronounced,” he said.

Despite the uncertain economic outlook, Mr Tadgell said the market conditions positively favour the insurance sector including companies like QBE Insurance, Insurance Australia Group and AUB Group. Other sectors like energy and technology will also continue to do well as these are driven by secular changes.

“Secular changes like the energy transition and shift to renewables, backed by large Government fiscal initiatives like the US Inflation reduction Act, is providing opportunities for future-facing commodity suppliers and service providers like Pilbara Minerals and Worley.

“The technology evolution including the cloud, big data processing and AI also provides great opportunity for data centre providers like NextDC and Infratil as well as those companies that can harness the productivity and service benefits of this innovation,” he said.

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Grant Berry

Australian investors need to focus less on short-term disruptions and place greater emphasis on investments likely to offer long term sustainable earnings growth, according to SG Hiscock & Company portfolio managers.

Hamish Tadgell, portfolio manager of the SGH High Conviction Fund, said the emergence of the omicron variant of COVID-19 highlights the current uncertainty facing investors and need to take advantage of developments through taking a longer a long-term view that allows for flexibility.

“Investors need to be aware that an over-reliance on models can be dangerous, resulting in them not seeing the wood for the trees, or understanding the real issues facing them. They need to be able to adapt to change and take advantage of emerging trends such as the seismic shifts underway in decarbonisation and social infrastructure.

“It’s important that investors don’t fear uncertainty – it forces change, new ways of doing things, ingenuity, entrepreneurship. It is fundamental to an understanding of social, technological, and economic progress.“If we can manage risk, we can not only live with uncertainty but paradoxically enjoy it!

Uncertainty forces change, new ways of doing things, ingenuity, entrepreneurship. It is fundamental to an understanding of social, technological, and economic progress.

“We need to think about how to position the portfolio in the face of heightened inflation risk,” he said.

Mr Tadgell said it is hard to know if the current inflation pressures will be more structural in nature starting a regime change and shift from the deflationary era of the last 30 years to an inflationary era.

“But there is little question in our mind the inflation risk has increased with the COVID shock and unprecedented fiscal intervention and it seems prudent portfolio risk management to build some inflation protection into portfolios.“Long term secular forces are important drivers of future returns but we think it is important to have a barbell approach to manage the short-term forces and uncertainty. Identifying quality stocks with sustainable earnings growth is key in this environment. Some areas of likely growth include social infrastructure, debcarbonisation and national security,” he said.

Portfolio manager of the SGH Medical Technology Fund, Rory Hunter, agrees, and said seismic shifts in the way people live are accelerating technological and social investment themes, in particular.

“While there is currently excess liquidity in the market, investors are being more selective in identifying longer term stocks.

“All the demand drivers are in place to drive the performance of medical technology investments but there are valuation headwinds in the near-term. Investors continue to position portfolios to withstand a removal of the excess liquidity which has been a mainstay of financial markets since the onset of the pandemic.

“An oversupply of healthcare companies listing on the ASX and the macroeconomic backdrop has created short-term headwinds,” he said.

Grant Berry, AREIT portfolio manager, says the trend of short-term headwinds but longer-term tailwinds can also be identified in listed real estate investments.

“Broader business and consumer conditions continue to have a major role to play in how the office and retail property sectors perform respectively. When out of lockdown, many retail assets are supporting tenant sales above pre-pandemic levels. While we expect online sales growth to outpace sales growth from physical retail, both are growing. Physical retail has responded with improved click and collect and longer-term mixed-use development opportunities.

“Likewise, while flexible working arrangements are affecting office demand, we are also seeing that changing “people occupancy” levels don’t automatically mean a rise in official building vacancy levels, as the office may have peak and off-peak demand days. For example, in Perth CBD people occupancy is at 76 per cent of the pre-pandemic levels yet the official vacancy rate has declined to the lowest level in over five years.

“Industrial property is the favoured subsector; however, with the sharpest yields and limited differentiation in pricing between quality and secondary assets, we are more cautious.

“For 2022, the overarching message is that investors should be prepared to deal with ongoing uncertainty but they shouldn’t fear this. Instead, they should be on the lookout for the quality investment opportunities that will inevitably arise.”

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Hamish Tadgell

Australian companies have enjoyed one of their strongest reporting seasons in recent history helped by pent up demand, closed international borders and a second half of the financial year largely unencumbered by lockdown, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.

Mr Tadgell said the outlook for equities is also supported by encouraging signs the vaccination roll-out is gathering pace and combined with policy support remaining highly accommodative, this has helped reduce economic scarring and adds weight to future growth prospects.

“A key theme of reporting season has been the strength of corporate balance sheets. Companies have been quick to return cash in the form of higher dividends and share buybacks. With rates at record lows and a lack of alternative investment opportunities, much of this cash will potentially find its way back into equity markets.

“Too much cash chasing too few goods has been the punchline of the last 12 months. Resurgent demand colliding with supply disruption and capacity constraints has seen a surge in prices and profits for those companies able to meet demand, and asset prices more broadly”, he said.

Mr Tadgell also said reporting season highlighted how the last 12 months has shone a light on the ‘S’ pillar of ESG investing, or the social pillar, and companies’ digital resilience.

“COVID has tested companies’ relationships with employees, customers, suppliers and regulators and their ability to pivot and adapt. This has had a large bearing on whether they have survived or thrived.

“Technology and online capabilities have been critical enablers for staff to work remotely, so it’s forced every business to review its digital capability and, in many instances, accelerate technology investment plans.

“Against the backdrop of reporting season there are growing concerns growth has peaked. As the cycle matures beyond the ‘hope’ recovery phase this is not unexpected,” he said.

Mr Tadgell believes the growth phase of the market cycle still has some way to run yet and, while global growth momentum may have peaked, he remains constructive on the outlook for Australian equities.

“That’s not to say there are not emerging risks as the cycle matures. The strong rally in equity markets is seeing growing signs of fear-of-missing-out, a surge in both IPO and M&A activity, and extremes in some valuations”, he said.

Mr Tadgell said there is also the risk with vaccines becoming more universally available, policy makers are looking to scale back emergency measures. The Federal Reserve has confirmed again it is set to taper, and this could lead to higher real yields and create a headwind for equity valuations.

“Past this current lockdown, Australia is likely to be living with the virus. This is something that we haven’t experienced, and it’s uncertain how it will impact on confidence and behaviour”, he said.

Mr Tadgell said this all paves the way for a potentially higher level of volatility in coming months and requires an active approach to managing risk and capitalising on opportunities as they emerge. 

“For us, it means tilting the portfolio more towards those companies who will benefit from lockdown and being active around those opportunities, but also remaining disciplined around investing in quality business where there is a margin of safety,” he said.

In recent months, the SGH20 Fund has reduced its position in the banking sector and exited RIO Tinto and added telecommunications infrastructure company, Chorus, to its portfolio.

“If you look at lifestyle diversification and the learnings from COVID lockdowns, quality cyclicals will present some good opportunities once the economy reopens and over the course of the next six to 12 months. But, as the market matures, investors need to also have an eye to capital preservation and ensuring they have enough defensiveness in the portfolio,” he said.

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Hamish Tadgell

Equity markets may be able to continue their rally on the global re-opening dynamic and the vaccine roll-out, but they face a number of issues in the second half of the year, in particular how people live with virus and persistence of inflationary pressures,  says Hamish Tadgell, portfolio manager at SG Hiscock & Company.

He said the emergence of new strains of the virus and pace of vaccine rollouts continues to heavily influence equity market performance.  

“In Australia, if we are going to learn to live with the virus and stop locking down the economy, we need to mass vaccinate as quickly as possible. But a lot more also needs be done in screening and monitoring symptomatic as well as asymptomatic testing. In Europe and the US this is already a reality and testing technology is evolving quickly. 

“Several Australian companies such as Ellume are leading the way in this area.  Ellume recently became the first home-based rapid diagnostic COVID test approved by the US FDA and is now contracted to the US Department of Defence and Delta Airlines to provide test kits for screening. 

“The fact that Australia is not adopting world-leading home grown technology like this and embracing broad based monitoring and screening is a major area of public policy failure which needs addressing if we are going to learn to live with virus and avoid rolling lockdowns,” Mr Tadgell said.

Another big question into the second half of the year is whether the inflation scare in the first half  will prove transitory or is more structural in nature and how central banks respond. 

“The pandemic has seen a radical pivot to fiscal policy and explosion in money supply but what is not known though is what happens to the velocity of money as economies continue to reopen and government payments start to roll-off. 

“If households spend their savings over the next year or two, it has the potential to add to the reopening inflationary effects and become more persistent and entrenched in higher prices. 

“For now, the Federal Reserve Bank (the Fed)  continues to maintain the line any pickup in inflation on reopening will prove to be transitory and exaggerated by the base effect.

“What is meant by transitory is becoming the question. The Fed has already conceded that it has underestimated the cyclical rebound out of the pandemic by increasing its 2021 real GDP growth and PCE inflation forecasts from 4.2% to 7% and from 1.8% to 3.4% respectively since the start of the year.  Then, at the mid-June FOMC meeting it brought forward the first-rate increase from 2024 to 2023. 

“This all suggests the Fed sees the combination of pressures contributing to higher prices as being greater than expected, but still more temporary than structural and not sufficient to warrant addressing tapering issues.

“The practical reality is it is still far too premature to conclude the inflation scare is over, and the bond market is now more positioned for a sell off on any renewed inflationary concerns.”

Mr Tadgell says the real test of whether the pick-up in inflation will prove transitionary or not is likely to become clearer in the second half of this year. 

“The risk over coming months is CPI remains elevated bolstered by reopening and pent up demand. It will be important to monitor inflation rates in August and September since the month-on-month increase slowed in those months last year. 

“We remain of the view equities can continue to rally on the re-opening dynamic as the vaccine roll-out proceeds, and highly accommodative monetary and fiscal policy.  Any hint of earlier than expected tapering by central banks, and therefore earlier than expected interest rate hikes, remains the main risk for a market correction,” Mr Tadgell says.

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Hamish Tadgell

SG Hiscock & Company has launched a new fund that will invest in Australian medical technology companies.

The SGH Medical Technology Fund will have a social impact focus and aims to provide long-term capital growth by investing in a portfolio of medical technology companies where innovation plays a crucial role in improving global health and economic outcomes.

Rory Hunter, portfolio manager of the Fund, says Australian medical technology is among the best in the world and the Fund will offer investors access to high quality growth companies, both established and start-up.

“Australia’s history of medical breakthroughs includes penicillin, the bionic ear, ultrasounds, spray-on skin, and the cervical cancer vaccine. In addition, there are many research facilities in Australia which are recognised as medical centres of excellence at a global level.

“Investors will also benefit from several tailwinds that are driving innovation and growth in medical research and technology.

“The nature of ageing populations in developed economies has been understood for some time, but we are starting to see the full impact of this demographic trend.  There is ever increasing pressure on healthcare institutions to invest in early intervention and prevention, with research showing that medical care is less effective in improving health outcomes than early intervention strategies.

“The COVID-19 pandemic has added a further layer to this.  We are seeing greater demand for diagnostic testing and healthcare services, and significant government spending to support the industry.  The 2021 Federal Budget included a “patent box” tax break for medical and biotech companies to help encourage research and innovation and we expect further government initiatives to follow this.

“Finally, we believe investors who are interested in social impact investing will find the Fund attractive.  Through its investments in Australian medical technology and innovation, the Fund will actively contribute to the welfare of future generations as well as donating a portion of management fees to Australian medical research and commercialisation.”

The SGH Medical Technology Fund will invest in a mix of established and start-up medical technology companies, listed and unlisted, in Australia and New Zealand.  It will typically hold between 40 and 60 investments.

The Fund will be run by the SGH Emerging Companies Team and will be guided by the SGH Medical Technology Advisory Board, made up of industry leading experts including:

• Brenda Shanahan AO as chair (non-executive director, SG Hiscock & Company; non-executive director, Clinuvel Pharmaceuticals; former chair, St Vincent’s Medical Research Institute; chair, Aitkenhead Centre for Medical Discovery)
• Professor Mark Cook (chair of medicine, St Vincent’s Hospital; chair of medicine, University of Melbourne; state chair, Victoria, Australian and New Zealand Association of Neurologists; director, Graeme Clarke Institute for Biomedical Engineering)
• Sam Lanyon (co-CEO and co-founder, Planet Innovation; executive chair, Lumos Diagnostics).
• Stephen Hiscock (chairman and managing director, SG Hiscock & Company; director, DMP Asset Management)
• Hamish Tadgell (head of research, SG Hiscock & Company; portfolio manager, SGH20)

Additionally, SGH will establish a registered charitable foundation which will be funded by 10% of net revenue from the SGH Medical Technology Fund, including performance fees.

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Hamish Tadgell

The market continues to shift from the hope to the growth phase as the Australian economy rebounds from the shock of the COVID-19 pandemic and associated lockdowns, but new risks are emerging that investors’ need to position for, according to portfolio managers at SG Hiscock & Company.

Hamish Tadgell, Australian equities portfolio manager, said the recovery in the last 12 months has proceeded faster than widely expected driven by the extraordinary level of policy support and vaccine roll-out.

“The unique nature of this crisis has seen an unusually sharp rotation and outperformance of cyclical versus defensive sectors over the last year, but the recovery has followed a fairly typical pattern from despair to hope to growth.

“While the cyclical recovery is now clear for investors to see, the risk is we are fast approaching peak growth, and as this cycle matures, growth remains positive but slows.

It’s to be expected that the rate of change and growth momentum will start to slow, but it seems premature to be calling the end of the cycle.

Business confidence and conditions are at – or close to – all-time highs in most developed countries, including Australia, and labour markets are still recovering, with central banks, including the RBA, adopting a broader measure of full employment before considering policy normalisation.

“Against this backdrop, there are little signs government fiscal policies are about to be prematurely withdrawn,” said Mr Tadgell.

Grant Berry, AREIT portfolio manager, said this theme is apparent in domestic property markets also.

“While there are some property investments trading on very high multiples, there is also a number of AREIT assets that are underappreciated by the market. Low price doesn’t necessarily mean low quality at the moment; nor does high price mean high quality. There are opportunities to gain exposure to quality core real estate at a discount with attractive yields.

“For example, in the office property sector, there is no doubt the rise of working from home is having an impact on office occupation. However, there will remain a place for offices; the key is to select the locations and set-ups that can grow. CBD offices may still be challenged but we have been increasing our exposure to suburban offices with lower rents, good parking and more favourable tenancy demand,” he said.

Mr Berry is also seeing opportunities for REITs with convenience retail holdings, and is increasing the Fund’s exposure to this subsector, “given favourable pricing, while benefitting from consumers shopping more locally.”

He expects growth in niche property AREIT sectors, which can be less economically sensitive, however pricing needs to be considered as they can trade at premiums to private market levels as well as core real estate within the AREIT sector.

Mr Tadgell added that a key question for investors is around inflation risk, and whether inflation is transitory or structural and how central banks will respond to this dilemma.

“The thing we are conscious of is investors have not seen an environment of strong synchronised global growth, rising commodity prices and inflation expectations for three decades.

“Investors didn’t really expect high levels of inflation in the early 1970’s to persist initially. It took some time for expectations to adjust. Similarly, in the early 1980’s, investors were doubtful of the start of a new deflation trend. Looking back over the last 100 years it’s also notable rising inflation rate episodes were mostly due to unexpected supply shocks leading to sustained increases in prices.

“The COVID crisis has been a major shock to the system, and the effective lockdown of all economies has arguably resulted in the biggest global supply shock in history,” he said.

Mr Tadgell said it’s important to recognise the forces of deflation have proved to be powerful and persistent, and the combination of extreme monetary policy, technology disruption and an aging population have been highly influential in contributing to the economic circumstances and disinflationary setting.

“The dominant secular and structural trends emerging from this crisis are far from clear, but we are seeing the maturing of the cycle, changing growth outlook and inflation risks requiring a more nuanced approach rather than necessarily through the lens of growth versus value.

“As a result, we’re focusing on identifying opportunities and building a portfolio around companies with pricing power, cyclicals leveraged to the cycle, and structural growth companies that have been derated on the back of higher inflation expectations. We’re also avoiding longer-duration assets without an adequate margin of safety or clear catalyst to re-rating, said Mr Tadgell.

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Hamish Tadgell

While the market appears to be pricing in a recovery in the next year or two, the overriding theme from reporting season was one of ongoing caution and uncertainty, said Hamish Tadgell, portfolio manager at SG Hiscock & Company.

“Perhaps unsurprisingly, the message by almost all companies during reporting season was that no-one knows what the future looks like.

“Yet when we look at the data on earnings per share, it is still forecasting a recovery in 2021. We think this is probably somewhat optimistic – after all, it historically takes, on average, three years for the market to return to its previous peak earnings level following a downturn. While we recognise this is an event-driven crisis rather than a structural or cyclical recession, and governments have injected massive stimulus, we would be surprised if things return to normal quickly given the economic challenges and dislocation.“

“Even those who have been beneficiaries of the COVID-related restrictions and lockdowns – such as home improvement and home cooking companies – pointed out the recent levels of growth would probably start to come back in the next quarter or two.

“In a very difficult and challenging environment, reporting season has also highlighted the more resilient business models and seen a flight to quality and known brands. Companies with multichannel capability who have been able to capitalise on the surge in on-line demand and are agile and responsive have taken market share and benefited significantly,” Mr Tadgell said.

He said reporting season has highlighted the extreme dispersion between those companies that are surviving – and even thriving – in the current situation, and those that are doing it tough.

“In many ways, reporting season has told us very little about company prospects for the year ahead. Guidance was rare, and guidance for growth even rarer, with results driven more by macro policy and positioning rather than necessarily fundamentals.

“However, for active investors, there have been some good opportunities in those companies benefiting from the ‘stay at home’ trend, the stimulus packages and the low interest rates. These include electronics and furniture companies that can participate in the shift to working-from-home and home-schooling, as well as food delivery and grocery companies.

“On the other hand, companies in the “out and about” category – such as travel and hospitality and retail shopping centres have been impacted by social distancing and isolation restrictions.

“There will be some mean reversion when the economy starts to open up, but this will be very dependent on how long we have to live with virus and how things open up.”

Mr Tadgell added any optimism about a recovery will be well and truly tested in coming months.

“We are currently seeing a tug-of-war between economic support versus economic reality.

“The massive government stimulus channelled through initiatives such as JobKeeper and JobSeeker, as well as loan and repayment holidays, is suppressing real unemployment and insolvency levels but, as the stimulus fades, it seems likely these levels will rise.

“A key question is whether policy will outlast the pandemic. The economy is currently on life support but what will happen if this is withdrawn – and is it even feasible that it will be withdrawn?

“Economist Milton Friedman once said ‘nothing is so permanent as a temporary government program’, and this was certainly borne out by the quantitative easing programs introduced during the global financial crisis, which have since become embedded for fear if they are unwound it will severely upset markets and economies . We may well find the same is true during this crisis,” he said.

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Hamish Tadgell

The havoc in stock markets in the March quarter from COVID-19 was on a scale rarely seen, with the economic fallout likely to expose vulnerabilities and growing bifurcation in sector and company performance, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.

Mr Tadgell believes businesses exposed to infrastructure spending and financing, essential goods and services, health and aged care, and data connectivity and information technology will be the likely beneficiaries of the post Coronavirus environment.

“When the virus itself starts to recede and the economy reopens, we expect to emerge into a world that has changed in many respects. The fact that most people are working from home and education has largely moved online means IT, data and connectivity have never been more important. If you hadn’t heard of Zoom six weeks ago, you almost certainly have now and are possibly using the service almost daily.

“Conversely, following three decades of uninterrupted growth in Australia, and given the rise in household debt levels and house prices, the risk of deleveraging however is now a reality. Consumer-facing sectors, including discretionary retail, tourism and leisure, are likely to face tougher times ahead,” he said.

Mr Tadgell said sectors and businesses exposed to the following areas that may appeal to investors seeking to reposition their portfolios include:

• Infrastructure spending and financing – initial government fiscal stimulus measures have focused on building a bridge to save jobs and businesses. The next phase is likely to be on job creation and Private Public Partnerships
• Essential goods and services – non discretionary goods will continue to attract demand. Leading manufacturers and suppliers in this space will likely cement their position and take share from weaker players
• Health and aged care – this will remain supported by strong underlying demographic trends, particularly the aging population through the burgeoning Baby Boomer segment.

If the recession is short-lived and economic activity rebounds strongly over the coming two quarters, then the current opportunity for buying stocks looks good, according to Mr Tadgell.

“But there is currently no way to make a prediction about this with conviction given the prevailing uncertainty. The fact that such events cannot be precisely defined and measured, and statistical and probability analysis cannot deal with them, is what leads to radical uncertainty, and explains why markets are in their current funk.

“Being too early can be as bad as being too late, with the risk things can stay volatile and the bottoming drawn-out. There is a need, however, to have an action plan and ensure, as Winston Churchill said, we ‘never waste a good crisis’, and capitalise on being greedy when others are fearful,” he said.

The continuing market volatility is among the highest on record and is likely to continue for some time. The global financial system has taken a big hit, even more damaging than the GFC, as it affects nearly every industry. The leverage in the financial system and sharp increase in ETFs and risk parity strategy volumes exacerbated the speed and extent of the market’s decline, with many investors forced to sell due to financial leverage, margin calls and portfolio redemptions.

“The sharp sell-off in the market throughout March means almost every company is on sale, and provides the opportunity to upgrade portfolios with quality companies that have previously screened well, but fallen down on valuation and lacked the required margin of safety.

“Those with a degree of connectedness to infrastructure, essential goods and services, health and aged care, and IT are in a far better position to capitalise on a changed way of life than those with a heavy reliance on more discretionary consumer spending,” he said.

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