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  • Writer's pictureMarcus Bogdan

Investor Update - August 2022

“The Australian economy is starting from a strong base with low unemployment and high levels of household savings, but the effects of inflation and higher living costs are placing pressure on parts of the economy.”

Wesfarmers 2022 Full-year results presentation

The ASX 200 rose 1.2% for August. The rise in Australian stocks was driven by Energy (+7.8%) despite the oil price falling >10% over the month. For the portfolio gains were led by Santos and Woodside, with both businesses reporting strong underlying earnings and cashflow generation for 1H22. The portfolio was also boosted by Spark NZ which delivered a solid FY22 result, but importantly raised its guidance for FY23 EBITDA and lifted its dividend guidance. Moreover, following the sell down of its Mobile Towers business, Spark announced its intention to return up to NZ$350m to shareholders via an on-market buyback.

Overall, the ASX 200 delivered earnings growth broadly in-line with analyst expectations. While June half results continued to highlight a resilient Australian economy, earnings will face the headwinds of higher inflation and rising interest rates in FY23.

After an exceptionally strong environment for earnings in FY21 & FY22 there are three major headwinds that could materially weigh on global economies and equity markets for the remainder of the year.

First, China’s Covid policy and property deleveraging has reduced industrial activity and has materially impacted metals demand. A lack of new property starts and a slowdown in industrial activity has resulted in lower steel and base metals demand. China continues to be a critical economy for the demand for both energy and metals.

Second, the European energy crisis is set to worsen as Russia has indefinitely suspended natural gas flows through the Nord Stream 1 pipeline. The situation for Europe is dire with an unprecedented rise in power and gas prices magnifying problems for the consumer, and industrial activity.

And third, the key takeaway from last week’s Jackson Hole speech is that the US Federal Reserve remains committed to bringing down inflation requiring a more protracted interest rate hiking cycle. Indeed, Jerome Powell commented that “restoring price stability will require maintaining a restrictive policy stance for some time.”

We are clearly cautious given the highly volatile economic environment that companies need to navigate through.

Yet, Australian companies have done remarkably well given the immense disruptions they have faced since the start of the pandemic. Encouragingly, both corporate and household balance sheets remain sound, supported by an historically strong labour market. Nevertheless, heightened prudence is warranted with an emphasis on the quality of earnings and balance sheets able to withstand the buffeting of uncertainty.


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