Investor Update - April 2023
The ASX 200 rose 1.85% in April with all sectors adding value except Materials. Thus far, equity markets have weathered multiple interest rate rises, stickier inflation, and a US regional banking crisis.
One of the key reasons why equity markets have been so resilient despite many of the risks is that corporate earnings and margins have held up better than expected, supported by low unemployment and a resurgence of migration levels. Moreover, volatility in equity markets remains low, seemingly pricing in slowing economic growth but no recession.
The most recent earnings reporting periods in Australia, the US, and Europe have generally exceeded expectations, underpinning the view that earnings are holding up better than feared.
At a portfolio level in April Northern Star, Integral Diagnostics, and Brambles were notable strong performers. Whereas Amcor, Ramsay Health Care, and Cleanaway Waste Management weighed on performance.
In April we reduced our position in Woodside Energy (WDS) and the proceeds were used to add to James Hardie (JHX).
Woodside Energy faces heightened uncertainty over the regulatory and fiscal environment in Australia for existing and future energy projects. A raft of policy changes and interventions have increased the risk profile for new and brownfield developments, from the anticipated step up in tax receipts from the Petroleum Resource Rent Tax (PRRT), the Australian Domestic Gas Security Mechanism, and the Natural Gas Price Cap.
We have therefore lowered our sector and stock exposure by reducing Woodside, which has relatively higher exposure to the fiscal and regulatory changes through its US$12b Scarborough/Pluto Train 2 project which is under construction, as well as other brownfield developments.
In January this year we initiated a position in James Hardie as the company was experiencing a sharp deterioration in line with residential construction markets in the US during the second half of 2022. Since then, the housing activity level has shown incremental improvement, with the average Freddie Mac mortgage rate gradually falling from near 6.7% at the beginning of March to 6.3% in mid-April. Sales of US newly built, single-family homes in March increased 9.6% from a downwardly revised reading in February. The NAHB Remodelling Market Index (RMI) posted a reading of 86 for 1Q 2023, same as 1Q 2021 and indicated positive trajectory in residential remodels’ confidence. The latest quarterly update and remarks from US homebuilders have been largely constructive about the prospects of the housing market. We have increased our position in James Hardie on the basis of the growing evidence of an impending US housing recovery.
In a world of a higher cost of capital we continue to preference quality defensive businesses (consumer staples, healthcare) together with energy and resources that remain well placed to benefit from the green transition, whereby infrastructure spending should be tailwinds for the sector in the coming years.