• Marcus Bogdan

Investor Update - March 2022



Australian equities have outperformed the Rest of World for the second month in a row, driven by strong gains in Resources and Banks. The ASX 200 rose 6.9% in March, with Australia benefiting from its high commodity exposure and an improved outlook for bank margins.


On face value it seems counter-intuitive that equity prices have rebounded so strongly given an increasingly challenging backdrop of the Ukraine war, rising inflation and central banks tightening monetary policy. Nevertheless, the buoyancy in equities may be explained by several factors.


  • First, despite the prospect of central banks raising interest rates, in real terms rates remain negative as inflation remains stubbornly high. Equities provide investors some protection against rising inflation, notably evident in commodities/ energy companies and defensive industrial companies that benefit from pass through price mechanisms.

  • Second, Australian equities continue to deliver strong earnings momentum relative to other global equity markets. Earnings revisions remain positive and the ASX 200 is expected to deliver EPS growth of ~10%+ for FY22.

  • Third, the ASX 200 dividend yield is ~4.1% and ranks as the equal highest in the developed world. Australia’s dividend yield has been bolstered by high commodity prices with BHP expected to pay more dividends than the 4 big banks in the 12 months to June 2022. Moreover, the ASX 200 dividend yield is supported by a high payout ratio with Australian corporates paying two-thirds of their earnings in dividends. And finally, balance sheets for ASX 200 remain strong, with Net Debt to EBITDA at ~1 times near two- decade lows.


For March the strongest gains in the portfolios were BHP, Commonwealth Bank/National Australia Bank and Macquarie. Whereas Ampol (divested in March), Brambles and Spark NZ weighed on attribution.


While the rebound in equity prices has been impressive, we remain cognisant that the challenges of the war in Ukraine, ongoing supply chain disruptions, persistent inflation and rising interest rates should temper investor enthusiasm for the rally in risk assets to continue unabated. Indeed, the recent inversion of the US yield curve has prompted concerns about recession risk for the global economy.


At a portfolio level, we are diversified across the major banks, commodities, consumer staples, healthcare, and telecommunications sectors. Within these sectors we favour exposure to the industry leaders (namely, BHP, Cleanaway, CSL, & Woolworths) companies that have historically delivered more dependable earnings and dividends and remain well anchored with conservative balance sheets.