The Point

Whether it’s tech stocks or sporting teams, go for ‘franchise assets’

THE record-breaking $US6 billion sale of the Washington Commanders NFL team last month is the latest in a rush of billion-dollar transactions involving trophy sporting teams.

If you can choose the right sporting “franchise” to buy, the returns are eye-watering.

Our head of global equities Ashley Pittard hasn’t bought any sporting teams recently.

But like the most successful sport transactions, Ashley focuses on what he calls “franchise assets”.

“Franchise assets – companies that are number one or two in their space or are monopoly or duopoly business – are highly valued among investors at the moment,” Ashley says, pointing to the tech leaders dominating Wall Street.

“The lesson for investors is that you want to be selective, and you want to be concentrated when investing.”

“You also want to be defensive because there are uncertainties in the world around the macro-outlook and credit.”

Global equities: Boeing, Airbus look good as tourism takes off

If you experienced shoulder-to-shoulder tourist crowds during a recent overseas holiday, you might be wondering how to get exposure to the fast-recovering travel industry.

One way is via plane manufacturers says Pendal global equities PM Ashley Pittard.

Ashley recently attended the 2023 Paris Air Show during two months of travel, where he met company executives across Europe.

More than 1000 new plane orders were announced at the show, demonstrating the rude health of the two major manufacturers, Boeing and Airbus, says Ashley.

“Demand for planes is very, very strong,” Pittard says. “The backlog for the industry is about 8000 units which is about the next ten years of production.

“China is slowly opening up again, albeit slower than Europe. There is also a sustainability trend – airlines are getting rid of older planes and buying new, more efficient options. And there is also higher airline yields – more people are flying.”

Ashley Pittard: The most forecast recession ever has been delayed again

Bank of America last week became the first big Wall Street bank to reverse its recession call.

Are they right?

“Given the strong capital expenditure numbers we’re seeing in the US June-quarter earnings season, it’s going to be very hard for the US to have a recession this year,” says Ashley Pittard, who heads up Pendal’s global equities investment team.

“What you are seeing in the earnings numbers, and what you have seen the entire year, is that capital expenditure is accelerating – 15 per cent in the current quarter, year-on-year, and 14 per cent in the first quarter.”

“It’s very hard to have a recession when your capital expenditure is so high,” Ashley says.

In terms of numbers, US company earnings have beaten estimates by about four per cent, and by one per cent on sales.

Ashley Pittard: US recession will be shallow

“It’s highly, highly likely that there’s going to be a US recession this year,” says our head of global equities Ashley Pittard.

“But there’s a difference this time around because of robust capital expenditure.

“It’s clear this recession is going to be shallow. Invest through it, because valuations are compelling.

“There’s been a de-rating of the market and we are going to have earnings growth when we get out of this downturn.”

Which sectors? “Last year we were pushing the Covid losers – financials and energy – and they’ve done very well,” says Ashley.

“Going forward you still want some of those names, but also you need some of the 2022 losers.

“Names like Amazon, Netflix and other media streaming assets. You want to have Covid losers plus selective 2022 losers.”

Global equities: It’s time for ‘Covid losers’ to shine

What can investors learn from US earnings as big-tech layoffs continue?

For equities investors, 2023 will be a story of correcting a “misallocation of capital” that occurred during the pandemic, says Pendal’s head of global equities Ashley Pittard.

“You don’t want to be in the Covid winners, you want to be in the Covid losers.

“There has been an over-investment in technology and the cloud and a misallocation away from industrials, supply chain, energy and those sorts of companies.

“You’re now seeing that misallocation of capital unwind.”

As for the big picture, a weaker US quarterly earnings season indicates a recession is likely next year, says Ash.

But there’s evidence US companies are rebuilding supply chains post-Covid, which should soften the impact as capital spending offsets slowing consumer demand.

Global Equities: How US earnings are likely to land

Next week we’ll start to find out how US companies fared in the September quarter – and expectations are low.

“We expect continued volatility,” says senior global equities analyst Sue Scott.

“This is partly because the market is finding it very difficult to gauge how a reversal of Covid spending is affecting operating conditions, alongside higher interest rates and inflation.”

US shares ended the quarter broadly where they started, trading at about 15 times expected earnings.

“But that’s only useful if you believe the ‘E’ in the price-to-earnings ratio,” says Sue. “That’s the big debate.

“The market is still expecting growth – both in the third quarter and in 2023.

“But the real difficulty for investors is making sense of conflicting data.

“Companies are reporting numbers that could reflect deteriorating consumer health – or it could just be a reflection of dislocation in global trade and spending patterns as a result of Covid starting to normalise.”