The ability to navigate headwinds including persistent inflation, the impact of cost pressures and challenges posed by sector-specific movements, stood our portfolio in good stead during the recent company reporting season, says portfolio manager David Grace.
The half-year company reporting season for 2023-24 delivered overall positive results, reflecting some easing of concerns as companies responded actively to address the impacts of prevailing pressures. Margins remain resilient and volume growth is generally solid.
Further cautious reassurance is provided by signs of easing wage inflation and increasing labour availability, although cost bases remain high and announced job cuts are becoming more prevalent. In addition, consumer spending, although undoubtedly softening, remained resilient in the period and balance sheets are generally in strong shape despite the impact of rising interest costs, with both US and Australian economic data remaining strong.
More broadly, resource sectors were poor performers as demand drivers continue to soften at the same time as capex is increasing, with continuing uncertainty about the duration of the current cycle.
The effects of continuing uncertainty was also evident in significant share price reactions on results day, with share price movements nearly double that of the long-run average in the order of plus- or minus-ten per cent in some 15% of ASX 200 companies.
Investor sentiment generally solid, tech outlook driving upswings despite market challenges
A number of other indicators of the contradictions in the current environment are worthy of note. While the potential for rising bond yields is a risk, this is somewhat offset by improving growth and the expectation that the next cash rate move will be downward.
Against this backdrop, investor sentiment toward equity markets was generally positive, both in Australia and the US. An uptick in M&A activity is another indicator of pockets of optimism.
The continuing surge in interest in Artificial Intelligence (AI) also resulted in rising values in certain technology stocks, contributing to the jump on results day. This is despite ongoing uncertainty about how the fortunes of both the technology applications and the companies concerned will ultimately shake out.
Portfolio highlights: dividends ahead of forecast
The composition of our portfolio continued to demonstrate strength and durability, evidenced by dividends four per cent ahead of forecast. This reflects the performance of companies selected for their strong balance sheets and ability to deliver for shareholders over the long term, even through more volatile economic times.
Key companies that withstood some of the earnings pressures in the recent period are Santos Ltd (ASX: STO), Woodside Energy Group Ltd (ASX: WDS) and Rio Tinto Ltd (ASX: RIO).
Outlook remains focused on value and opportunity
Looking ahead, while market uncertainty and softening of certain sectors is likely to continue, corporate access to capital remains strong.
While the outlook for industrials profit margins has exceeded low expectations, the recent strong performance of the market is largely explained by expansion in earnings multiples which is not likely to be sustainable, as valuations are now very full for many of these companies.
We are seeing value in many cyclical sectors, notably energy, materials and REITs. While we are comfortable with existing portfolio holdings, we continue to look for investments in companies that pass our quality threshold.
Overall performance of the portfolio this reporting season highlights the value of investing in high-quality companies, and taking a steady, long-term view based on enduring fundamentals rather than riding short-term market waves.