Over the course of the pandemic central bankers spent considerable time reassuring investors what might lie ahead in terms of both interest rates and inflation being prudently anchored. Alas, the glide path back to a ‘goldilocks’ economy assumed that inflation would be transitory in nature. In the end, inflation has prevailed. Now the dolorous combination of errant inflation and an unwelcome slowing of economic growth is the central challenge.
Investors are now focused not on what the shape of the recovery will be (V,L,W), rather whether the forthcoming downturn will be soft, hard or finely balanced. What is evident is that foretelling the outcome is unknowable. Our working assumption is that heightened vigilance is warranted, with a portfolio layered with a combination of industry leaders that have exhibited greater resilience through economic cycles. The hallmarks of durable earnings and conservatively financed balance sheets remains the course of the day. In times of heightened uncertainty industry leaders in vital industries provides a safer harbour, and ideally the true industry leaders can enhance their competitive advantage in times of economic duress.
While there may be a cascade of adverse factors to navigate, there has been the silver lining of the reopening of international borders that has allowed us to return to visiting companies with face-to-face meetings in the jurisdictions in which they operate. Many of the ASX200 companies we invest in have significant operations abroad. Indeed, first- hand experience of meeting industry participants in their local markets has provided invaluable insights into our understanding of companies and industries. We recently returned from the UK and Europe conducting meetings across banking, healthcare, logistics, and mining sectors, our key observations were:
Brambles – Pricing & surcharge mechanisms in contracts has been an effective tool in passing through cost inflation. Demand & pallet scarcity providing pricing power for Brambles. Longer inventory cycle remains an ongoing risk as companies are holding onto pallets longer and lead to ongoing pallet shortages, however, BXB has not seen a collapse in demand.
CSL & Healthcare – After two years of supply disruption, now witnessing industry wide recovery in plasma supply volumes with structural demand drivers for the plasma therapies in place. Higher collections improving unit economics with meaningful margin uplift expected in FY23. Private healthcare market coming back strongly in the UK as backlog for GP & NHS services at near record levels.
Mining – Across the mining industry do not underestimate how difficult it is to bring on new supply in either brownfield or greenfield development. Scarcity of supply and underinvestment will a key challenge for decarbonisation. Mining industry remains disciplined on capex, debt and focused on shareholder returns.
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