The Point

Aussie mid-caps that could benefit from India’s growth story

Pendal’s emerging markets team last week highlighted India as a growth story.

This week Pendal Aussie equities PM Brenton Saunders makes the case for a handful of Aussie mid-caps in line to benefit from India’s growth.

“India has around 1.4 billion people. It’s a democracy that’s had a number of false starts in terms of growth, political and economic reform.

“But now it’s had four or five years of achieving reform,” says Brenton, who leads Pendal’s Aussie mid-caps investing strategy.

“Sovereign wealth funds and private equity money are moving into the economy.”

On a recent research trip to India, Brenton observed rising literacy rates, improved education standards and a huge, skilled workforce.

Aussie equities: Three mid-cap themes that look promising

Three themes – energy, data centres and battery raw materials – provide promising opportunities in the ASX mid-cap space at the moment, argues Pendal equities PM Brenton Saunders.

In energy, short-term considerations revolve around oil prices and the geopolitical backdrop, Brenton says.

“It’s not just a function of the conflicts in Israel and Ukraine – but also how the US economy performs especially ahead of the election next year.”

Medium-term opportunities come from companies with strong positions in transition fuels such as natural gas. Longer-term opportunities are around uranium, he says.

Brenton also likes the data centre space as business demand for bandwidth and data storage grows – including via the AI theme.

“And it might be on the nose at the moment, but the demand for batteries and battery materials continues to ramp up aggressively,” he says.

“We are dealing with an oversupply of some raw materials for batteries, and of batteries themselves. But this should clear as EV penetration progresses.”

Aussie equities outlook: two questions hold the key

THE fate of markets over the rest of 2023 largely depends on two questions: the outlook for rates and inflation, and the resilience of the Chinese economy.

That’s the view of Pendal PM Brenton Saunders, who manages Pendal MidCap Fund.

On inflation, markedly different outlooks in Australia and the US are leaving investors unsure where to turn, Brenton notes.

Australia is at least three-to-six months behind the US inflation cycle, he believes.

“In the US it feels like inflation has peaked and is making its way down – albeit more slowly than many had expected.

“But in Australia, we’re still seeing some fairly aggressive inflation in certain parts of the economy – mostly labour-related.”

Compounding that is a softer approach from the RBA compared to other OECD economies.

“We can realistically expect to see rates go higher and inflation remain an issue in Australia for a while.”

Brenton Saunders: ASX mid-caps offer exposure to fast-growing sectors such as battery metals

Australia finally has a national strategy to “encourage greater use of cleaner, cheaper-to-run electric vehicles”.

The new ALP policy, alongside similar plans around the world, should help boost demand for “battery metals” such as lithium, produced by a range of ASX-listed miners.

What’s the best way to get exposure to quality stocks in this sector?

Pendal PM Brenton Saunders argues in favour of Aussie mid-cap portfolios.

Mid-cap portfolios are typically less concentrated and offer access to fast-growing industries such as cloud computing, medical innovation and battery metals.

Medium-sized companies tend to offer higher earnings growth than large-cap companies, often with less risk than small caps, says Brenton.

Brenton manages Pendal MidCap Fund, which invests in the 100 biggest companies outside the ASX50, with market caps ranging from around $1 billion to $10 billion.

“It’s really the sweet spot of corporate Australia. It’s a very useful addition to any balanced portfolio.”

Brenton and Australian lithium industry pioneer Ken Brinsden explained the opportunities in a recent webinar.

Aussie equities: What we can expect from earnings in the second half

Australia’s economic cycle has gone on longer than expected – and it showed in the recently ended ASX earnings season.

Somewhat surprisingly, most parts of the economy are still in reasonably good shape despite a string of interest rate rises.

The strong jobs market is a factor, helping prop up consumer spending.

“But the expectation is that higher interest rates will likely hurt earnings in the rest of the financial year,” says Brenton Saunders, who manages Pendal MidCap Fund.

“Across the market as a whole, revenue beats were pretty widespread even though many companies missed earnings forecasts at the bottom line. Revenue beats were much higher than profit beats.

“We saw profit margins reduce and that relates to higher costs. In many cases, despite high product price increases, costs increased at a faster rate, resulting in margin pressure.”

Brenton Saunders: what to watch in ASX earnings season

Company outlook statements will heavily influence share performance in the ASX half-year earnings season, says Pendal’s Brenton Saunders.

Australian listed companies will report results for the December half over the next few weeks.

Reporting season comes against a backdrop of uncertain global macro-economic data which has the markets on edge as investors try to assess the outlook for inflation and interest rates.

“Most of the focus is going to be on the outlook statements rather than the results companies produce on the day, says Brenton, who manages Pendal MidCaps Fund.

Companies with strong retrospective earnings results and weak outlook statements could be sold off by a market “trying understand what 2023-24 will look like”, says Brenton.

“In general, we expect a complicated reporting season and no real trends.”