Hear from our Chief Investment Officer, Jamie Nicol, as he discusses the recent reporting season, the winners and losers and where he sees opportunities in the market.
Yeah, it was a very busy month, always is in August when we have reporting season. But there was also a lot happening from a macro perspective. And I think the key thing from a macro perspective is the market has been oscillating between no landing, hard landing, soft landing concerns around the shape of the economy. And I think while the market’s been in this sort of no landing environment for the last seven months, the focus has been on those high quality AI exposed tech stocks, which have been doing really well and have got good momentum and people have tended to stick to their winners. But as we saw through the month, as the market becomes a bit more comfortable with the outlook for inflation, certainly in the US and the potential for interest rate cuts, the market started to think about a soft landing scenario. It opens up more stocks that you can potentially buy that will benefit as interest rates get cut. But then as economic data deteriorated a bit more in certain situations, unemployment data and so forth, then the market starts to get a little bit worried about a hard landing scenario. So the market’s oscillating between those three characteristics and from our perspective, we’re tending to do better when that momentum fades and starts to think about opportunities for some quality companies that have perhaps been a little bit out of favour.
There was two categories of stocks that did really well. It was those premium stocks trading at premium prices that continued to remind people of their quality. So stocks like car sales, WiseTech, they’re quite expensive, but they did deliver good results in an uncertain environment. The other category was at the other end of the spectrum, it was some stocks that have been troubled in recent years heavily shorted and they started to deliver on improvement programs, things like Aurora, Lendlease Downer, and they had strong bouncers. So two extremes, but when we look at the results overall, we think 24 sort of delivered in line with expectations. But when people look forward to 25, there was some downgrades around as the economic climate, big, big ins to slow. So we certainly saw that in the consumer, although it was a mixed bag there. jb Hi-Fi delivered a great result. People are still interested in spending on technology on their phones, but stocks like Woolworths have incredibly defensive, but they’re still seeing trading down as people trade out of Woolworths into Aldi and into some other areas, Amazon and the like. And in addition to that, west Farmers saw slower activity from Bunnings. I think housing related stocks are seeing quite subdued activity in Australia in particular.
Probably a sort of a little highlight was banks probably delivered in line with expectations, but their outlook is very subdued. They offer no growth. Competition has been in a little bit of a hiatus over the last three months, but it’s heating up a little bit and they’re very expensive, so we’re not too keen on that area. And then resources also seeing a bit of softness from China. So you can see with that overall softness in the outlook, it suggests to us that they’re much closer to that interest rate cutting cycle beginning than what the market anticipates. And RBA is looking for evidence of inflation coming off, but it won’t take much for them to change their mind. I think now that the economy’s beginning to slow, but as always when there is uncertainty, it creates opportunities. And our focus is on finding those quality companies when there are out of favour and there are opportunities emerging in this environment.
The two opportunities that we’d like to call out tend to be stocks whose earnings look subdued, but are really high quality companies. And for us that’s James Hardy right now activity and housing and renovations is quite subdued, but if interest rates start to get cut, I think that activity will start to pick up. And we like James Hardy’s long-term opportunity in the us very strong market leader winning market share. There’s a big long-term opportunity in the US because there’s about 40 million houses that are 40 years old and that they’ll need to get renovated. And many people took out mortgages at very low interest rates. They’re locked into these houses and they’ll need to renovate at some point. So as interest rates get cut and confidence resumes, we think the growth outlook will look quite strong. So Hardee’s had a mixed result and flagging sort of a subdued next quarter, and as a result, the stock was a little soft and that’s presented an opportunity for us to really rebuild that position to a much more meaningful position for us.
The other one would call out is treasury wines, which we thought had a really excellent result. So it delivered 20% growth in the second half is flagging double digit growth over the next few years as it rebuilds its position into China. The stock’s been quite soggy and I think largely because a lot of luxury exposed consumer stocks in China have been quite subdued. Louis Vuitton and those type of businesses, I think people are avoiding stocks exposed to the Chinese consumer. But I think the differentiation for treasury is that it’s coming from a point of zero. It’s been locked out of that market with tariffs. So it’s really rebuilding its position and expectations aren’t too high. And when you look at treasury, it’s been quite transformed over the last four or five years. It’s now about 85% luxury looking forward, and that’s quite a differentiated business on the Australian market. It only trades at 15 times earnings. It’s got a great portfolio of assets, obviously including Penfolds, but a very strong luxury position now in the us. So we think that’s getting underestimated and presents a good long-term opportunity.
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