We recently sat down with Chief Investment Officer, Jamie Nicol to discuss the current market and the opportunities he sees arising from the recent reporting season.
Well, we’ve had a very big move in market since about last October, November. There’s been a few factors at play. We saw a peak in interest rates. Bond yields start to come down and people no longer feared that interest rates were going to continue to rise. So that’s formed a firm base for which investors could start to value companies. I think we’ve had a bit of excitement around AI and we are starting to see some tangible signs of companies beginning to roll out AI and the potential productivity gains. And clearly the large techs stocks in the US are going to be big beneficiaries from that. So they’ve tended to lead the market higher. Then I think the final thing is the US economy has held up much better than we would’ve expected a year ago. So all of those factors has meant that it’s encouraged investors into the market. You’ve seen a fair bit of short covering sentiments improved and it’s been a very strong move in markets. It’s not all roses though. I think the rest of the world outside of the US is economically struggling a little bit. US is tending to crowd out a lot of those other economies and whenever sentiment’s this strong, you’ve got geopolitical risk potentially changing governments, it’s always worthy of a little bit of caution. Markets don’t move in a straight line and it wouldn’t be surprising to see a little bit of a pause after such a strong move.
Well, there was a pretty volatile reporting season. We saw some pretty big moves either way, but what was kind of surprising is by the end of a reporting season, earnings were quite flat. There wasn’t much change in people’s earnings expectations. Now, despite that, the market was up quite strongly. So what we did see in terms of market moves was quite a valuation uplift. We saw some stocks with really good momentum continue to run quite hard, and so that was a little bit of a surprise to us. So the key segments of the market that did well, the consumer stocks retailers did better than expected. Even though they were talking to slowing consumer demand at the beginning of this year, they still tended to perform quite well. I think a lot of technology stocks also did well with that momentum and excitement being generated out of the us. Continuing to see those valuations get uplifted. We did see some tangible signs. Speaking to companies about AI I thought was really interesting through reporting season. For example, Suncorp discussed some of their AI tools that they’re rolling out at a call center. If you get a call, someone’s asking whether a policy covers flooding rather than have a human thumb through a policy document, AI can very quickly identify whether the policy’s covered. So you can see some of those really practical benefits that are going to drive productivity into the future and that’s coming faster than what we would’ve thought six months ago. So I think there is some positives emerging through that ai. I think more broadly, costs are still higher in most areas, although we are seeing signs that inflation is starting to peak and starting to pull back a little bit. Again, talking to insurers, they’re talking about while they’re still getting good price rises potentially in six months, that’s going to start to ease. So overall, from our perspective as always, mixed bag, you see some good results and some poorer results. I think the key area that we’re trying to take opportunities from though is some of those stocks that we felt had pretty good results, which the market underacted to.
There was plenty of stocks where the market reacted strongly to, but we’re tending to try to avoid those. A lot of those have really too much momentum. Valuations are pushing too hard, whereas a stock for us like CSL, we think delivered a good result shows really good growth outlook for the next five years, and the market’s tend to ignore it at the moment. Finding other parts of the market to buy. The key things that are going to drive its growth is really recovery. Post Covid was really difficult to sit for CSL. It couldn’t collect plasma as effectively because everybody was locked down and we’re in a recovery phase from that. One of the things they announced at the result was the introduction of a new system for collecting plasma that promises to really improve productivity in terms of plasma collections that can drive productivity improvements of 30%, which is means they don’t have to roll out as many centers can improve margins, and their margins in their bearing business are sitting around 50%.
Whereas pre go covid, they’re around 57%. So expect over the next three to five years that you’re going to see that growth back to that pre covid margin level, which will drive tremendous profit growth. And right now you’re getting it at the cheapest multiple. It’s been for some time as the market looks for other areas of more immediate growth. So I think there are some quality businesses trading at good valuations. I think you have to be a little bit more selective than you’ve been in recent years. And for us it probably means concentrating our positions a little bit more on some of our favored positions.