• Marcus Bogdan

Investor Update - February 2022



The rapid escalation in geopolitical risks has triggered a sharp rise in volatility for global equity markets. Yet against this backdrop, the ASX 200 rose 2.1% in February with the Energy, Materials and Banking sectors adding the most value. Whereas value was lost in the healthcare, technology, and telecommunications sectors. Notably Value stocks continued to outperform relative to Growth stocks as investors remained focused on the persistence of inflationary pressures and the prospect of tighter financial conditions.

In the face of the headwinds of Covid-19 lockdowns and supply chain disruptions, the February 2022 reporting season delivered positive earnings momentum. Overall, there were net earnings upgrades to ASX 200 profits of 0.9% or $1.3bn, the second strongest result since the global financial crisis.


The key themes of the February 2022 reporting period were:


1. The ASX 200 delivered a solid reporting scorecard. Earnings momentum continued delivering EPS upgrades above the long-term average. Net earnings upgrades of 0.9% equates to ASX 200 profits for FY22 to be in the vicinity of $141bn.


2. Earnings momentum favoured Cyclical and Value stocks. The uplift in earnings were largest across the Banks, Energy and Material sectors. Whereas the high P/E sectors of Healthcare and Technology broadly disappointed. For Healthcare, 2 years of postponement of non-Covid healthcare weighed on results.


3. Cost pressures. Strong revenue growth was offset by persistent cost pressures resulting in modest compression of EBITDA margins, with industrial companies most affected.


4. Capital Allocation Discipline. Despite buoyant revenue growth, investment spending (capex) intentions remain modest. Firms continue to favour buybacks, and M&A. Capital returns were the second highest in the past decade.


5. Balance sheets remain conservatively geared. ASX 200 companies Net Debt/EBITDA of ~1.2x is close to 20- year lows, with rising interest rates not yet translating to higher interest costs.


6. Commodities tight supply constraints. The potential disruption on the ban of Russian exports across the key commodities (energy, grains, metals) when global inventories remain extremely tight has further added to the risk of higher prices.


Currently there are many sources of risk that investors are contending with. The tragic events unfolding in Ukraine have introduced further unknowable challenges and risks to the global economy. Nevertheless, Australia’s tyranny of distance to the epicenter of Europe and its abundance of natural resources in agriculture, energy, and minerals provide a solid footing for the continued growth of the economy and corporate earnings. Amid the volatility, our equity portfolios remain steadfastly focused on holding Quality industry leaders underpinned by strong balance sheets.