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Australian Equities
Aussie equities: Why it’s smart to take the long-term view on M&A deals
Newspaper headlines have been full of merger and acquisition activity and associated capital raisings in recent months.
Chemist Warehouse-Sigma Healthcare. Brookfield-Origin. Newcrest-Newmont. Allkem-Livent. Woodside-Santos.
The activity is likely to continue in 2024, especially in the resources space.
Investors haven’t always been impressed with recent deals – but that doesn’t mean there isn’t opportunity, says Anthony Moran, an analyst with Pendal’s Aussie equities team.
“Markets tend to overreact, especially around M&A. That’s exacerbated at the moment with fears that the economic cycle is rolling over.
“Investors are concerned that companies are buying businesses that may have puffed up earnings or been trading on a cyclical peak.
“But if you can do the work on the acquired businesses and start to get an understanding and more informed perspective on the probability of the success of a deal, then a sell-off can be quite an attractive investment opportunity.”
Jim Taylor: What’s driving ASX stocks this week
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Jim Taylor: What’s driving ASX stocks this week
Crispin Murray: What’s driving ASX stocks this week?
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Crispin Murray: What’s driving ASX stocks this week?
Most people would be aware from last week’s per-capita recession headlines that Australia’s population growth is outstripping economic growth.
But population growth – especially immigration and temporary visas – is also supporting corporate earnings, says Pendal’s head of equities Crispin Murray.
“All up, we’re probably looking at about a 3 per cent rise in the population today versus a year ago.
“People are coming to Australia with money in their pockets, setting themselves up and getting accommodation – which is driving up rents.
“Part of the reason we’re seeing resilience in the top line of companies is because they’re basically driven by nominal GDP, not per capita GDP.”
Population growth is also offsetting the effects of the ‘mortgage cliff’ which forces households into higher, variable mortgage payments as low-rate fixed loans expire, Crispin says.
“With each company we met over reporting season, we talked about the issues facing them and if they were seeing consequences from this mortgage cliff. So far, the consequences are very limited.”
What’s driving ASX stocks this week
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What’s driving ASX stocks this week
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
There are two views on the medium-term outlook, says Pendal’s head of equities Crispin Murray.
The bears expect material weakening or recession in the US next year due partly to the lagging effect of monetary tightening on longer debt duration.
Unemployment might rise materially, affecting consumption and bringing forward rate cuts. Corporate earnings could fall and equity markets de-rate.
The bulls believe the peak in financial conditions tightening has passed and now presents a lighter headwind.
In this scenario, core inflation falls quickly, unemployment stays low and GDP growth resilient, reflecting a cycle distorted by the pandemic. Wages would ease off while consumption remained supported.
Falling inflation could prompt rate cuts, providing protection against a slowdown.
Aussie equities: AI and cloud computing drive data centre stocks
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Aussie equities: AI and cloud computing drive data centre stocks
Elsewhere in this newsletter, Pendal PM Brenton Saunders nominates data centre stocks as one of three thematic opportunities in the mid-caps space.
Pendal analyst Elise McKay agrees, having just returned from a US trip where she met with participants across the data supply chain.
Elise believes established data centre (DC) owners with existing capacity are best-placed to benefit from growing demand due to the time it takes to acquire land, undertake construction and manage power requirements and other complexities.
“I’m very bullish on the outlook for data centres,” Elise says.
The accelerating shift to the cloud is driving demand. Global demand is forecast to triple in the next five years, according to research from Cushman & Wakefield. Generative AI is adding to that shift.
“There’s strengthening demand for DCs and supply is tightening,” Elise explains.
In some major DC locations, such as Northern Virgina in the US, vacancy rates are at one per cent. In Australia it’s closer to 17 per cent.
Aussie equities: Why you should be scrutinising capital-intensive stocks
Equities investors have rightly kept a close eye on rising operating costs during the recent period of high inflation.
Now it’s time to pay greater attention to capital expenditure inflation, says Anthony Moran, an analyst with Pendal’s Aussie equities team.
“Any company with a fair bit of capital intensity will be exposed to price rises in coming periods,” argues Anthony.
“If you’re a capital-intensive company, capex inflation is going to erode returns, especially if you don’t have pricing power,” he explains.
“If you’re in an industry where there are just a few manufacturers and they all have the same cost base, maybe they can pass through the higher costs.
“But if it’s an industry like steel, which is a globally traded commodity, there is no pricing power.”
Elise McKay: Don’t be fooled into thinking AI has run its course
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Elise McKay: Don’t be fooled into thinking AI has run its course
Sentiment has dipped on the US mega-tech stocks, but it would be a mistake to believe the AI theme has run its course.
That’s the view of Elise McKay, an analyst with Pendal’s Aussie equities team, who’s just returned from a US tour where she met with dozens of companies.
AI was a topic in almost every meeting, Elise says.
“AI is not a fad. Economic wobbles and geo-political uncertainty may have contributed to a recent sell-off in the Nasdaq.
“But there’s strong evidence that over the longer term generative AI will have a big impact across the business landscape.”
Today’s winners may not be the winners of the future though, Elise says.
For example, Nvidia is now an AI infrastructure winner because its chips are in high demand for resource-intensive AI training.
But there are signs market growth is shifting from training to “inferencing”, which requires less computing power.
Aussie equities: where to hunt for category winners in this economy
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Aussie equities: where to hunt for category winners in this economy
THE global economy has shown resilience in recent months – but there are now signs it is gradually slowing, along with consumption.
“We are moving from single-digit growth to single-digit declines,” says Pendal equities analyst Anthony Moran.
“In this environment investor mindsets change from being comfortable about resilient demand to thinking about downside risks.”
The shift has been particularly prevalent in industrials, which have underperformed other sectors, says Anthony.
“Investors don’t need to put all their money into hyper-defensives because things may not be that bad.
“Look for companies that are going to grow above their category, or are able to grow market share, particularly if they are trading at attractive valuations.”
What’s driving Aussie equities this week
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What’s driving Aussie equities this week
Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams
THE dominant narrative of resilient global economic momentum and higher-for-longer rates continues.
US 10-year government bond yields rose 7bps last week, driven by higher oil prices, a slightly higher-than-expected inflation print and resilient economic and corporate data.
At the margins there was data suggesting China’s economy is turning a corner.
Commodities were strong overall and US dollar took a breather after its strong rally over the quarter-to-date.
The European Central Bank took a dovish turn after increasing rates last week. President Christine Lagarde indicated the tightening cycle was most likely done. The problem for Europe is they are heading into a recession.
The S&P 500 fell 0.12% and the S&P/ASX 300 gained 1.82% last week.
Crispin Murray: Two factors underpinning ASX company earnings
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Crispin Murray: Two factors underpinning ASX company earnings
Most people would be aware from last week’s per-capita recession headlines that Australia’s population growth is outstripping economic growth.
But population growth – especially immigration and temporary visas – is also supporting corporate earnings, says Pendal’s head of equities Crispin Murray.
“All up, we’re probably looking at about a 3 per cent rise in the population today versus a year ago.
“People are coming to Australia with money in their pockets, setting themselves up and getting accommodation – which is driving up rents.
“Part of the reason we’re seeing resilience in the top line of companies is because they’re basically driven by nominal GDP, not per capita GDP.”
Population growth is also offsetting the effects of the ‘mortgage cliff’ which forces households into higher, variable mortgage payments as low-rate fixed loans expire, Crispin says.
“With each company we met over reporting season, we talked about the issues facing them and if they were seeing consequences from this mortgage cliff. So far, the consequences are very limited.”
Small businesses are doing it tough. Cloud accounting platform Xero has some answers
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Small businesses are doing it tough. Cloud accounting platform Xero has some answers
Xero’s annual Xerocon event is known as ‘Coachella for accountants’ – a reference to a Californian rock concert with a cult-like following.
The ASX-listed cloud-accounting platform has a pretty strong following itself now, with more than 3.7 million subscribers in 180 countries.
That’s led to a pretty good understanding of the state of small-to-medium businesses (SMBs), says Pendal equities analyst Elise McKay.
Xero is seeing SMBs report slower sales growth in Australia, Canada, NZ, the UK and the US, though wage pressures are starting to ease in Australia, NZ and the UK, says Elise.
While SMBs are still unsure about the impact of AI, Xero is adding the technology to speed up repetitive tasks or provide better insights that help humans focus on high-value strategic activities.
“For example, helping to better enable reconciliations or provide better forecasting tools around things like cash flow. And potentially using generative AI to improve customer support.”
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