The ASX 200 fell 2.5% in February on the expectation that global central banks will need to further raise interest rates to control inflation. At a sector level, the combination of a stronger US Dollar and rising real bond yields was a major headwind for mining stocks which fell 7.5% for the month. By contrast, the strongest performing industry group was Insurance +6.5%, where rising bond yields supported higher investment income returns.
At a portfolio level, Brambles, Woolworths, and Medibank were the notable strong performing stocks. Whereas, the resource and bank stocks weighed negatively on performance, led by BHP, Northern Star, and National Australia Bank.
The February 2023 reporting period highlighted solid growth in company revenues but ‘cost inflation’ weighed on operating margins. While there was evidence that input costs have peaked, wage pressure and a higher cost of debt were significant headwinds for margins.
For the ASX 200, company earnings results were broadly in line with consensus estimates, neither exceeding or missing expectations. Overall, analysts upgraded their ASX 200 EPS forecast by a negligible 0.1%.
For the portfolio the results that were better than expected were: Brambles, CSL, Goodman, Macquarie, Medibank, Ramsay, Telstra, and Woolworths. The stand-out result was delivered by Brambles which upgraded its constant-FX basis FY23 guidance for revenue growth of +12-14% (previously +7-10%) and Underlying Profit growth of +15-18% (previously +8-11%).
Whereas softer volumes and/or elevated costs weighed on the results of: Amcor, Healius, Integral Diagnostics, News Corp, and Spark NZ. The healthcare service providers (Healius & Integrated Diagnostics) results were impacted by a slower recovery in operating volumes and inflation cost pressures that materially diluted operating margins. While both companies expect a “materially stronger” 2H23 as operating leverage improves with a recovery in their respective base businesses, no formal guidance was provided.
We believe that with inflation remaining stickier than expected, borrowing costs have yet to peak, which will pose an ongoing headwind for equity valuations. Notwithstanding this earnings for the ASX 200 companies are expected to deliver modest growth of ~4%-5% for the 2023 financial year. The resilience of labour markets and the reopening of the China economy should provide an important ballast to the global economy and company earnings for the remainder of FY23. Yet, there is no doubt that the backdrop for equity markets is challenging (cost inflation, further rate rises, the energy transition & a fractured geo-political environment) all of which are contributing to heightened uncertainty. Our strong preference is to position our equity portfolios to be weighted toward companies that have consistently exhibited earnings resilience and strong balance sheets (Brambles, Goodman, Woolworths) and industry leaders well positioned to grow through the economic cycle (CSL, Ramsay, Macquarie).
