Investor Update - March 2023
The ASX 200 fell only modestly (-0.20%) in March despite the elevated uncertainty caused by banking stress in the US and Europe. The swift action by regulators to stem contagion risk by implicitly protecting uninsured deposits in the US provided investor relief. Nevertheless, markets remained on heightened alert to the prospect of tighter credit conditions, felt most acutely in the ASX Real Estate sector which was down 6.4% for the month.
At a portfolio level, the Resources sector led by BHP, Northern Star, and the telecommunication company Spark NZ were notable strong performing stocks. Whereas Cleanaway Waste Management, Macquarie and National Australia Bank weighed negatively on performance. The collapse of Silicon Valley Bank (SVB) and the subsequent tightening in financial conditions has led to a sharp underperformance in the banks.
In March we traveled to the UK & Europe to attend the investor strategy briefings by CSL, Ramsay Health Care, and Sonic. We also met with several Australian companies (outside of healthcare) that have significant operations in the region including Brambles, Computershare, Macquarie, QBE, Rio Tinto, Worley and Xero. The key insights from these discussions were:
CSL plasma collection volumes have recovered to >10% vs pre-COVID levels. Manufacturing focus is on improving immunoglobulin yields from existing volumes.
The post-COVID revenue recovery for Ramsay is gaining month-over-month, with end 3Q23 run-rate best in >3 years.
UK/European banks are cautious in their outlook, but the sector remains well capitalised and the level of impairments is low.
Deterioration in commercial property is set to get worse as the higher cost of capital, availability of credit and slowing rental growth weigh on sector valuations.
Improving cost inflation, with lumber and transport costs moderating.
Manufacturers are de-stocking, right sizing inventory levels. Normalisation of supply chains has allowed Brambles to look for new business opportunities.
The global economy is at the early stage in the energy transition. Energy transition will continue despite the slowing global economy. Supportive policy regime in US and Europe will fund an explosion of energy transition projects.
Inflation Reduction Act (IRA) provides further support for traditional renewable technologies (Offshore wind, solar). Major impact is for new renewable technologies, it is a game changer. Accelerate the industrialisation of hydrogen, Clean-fuels, and Carbon Capture.
Key challenges for energy transition are regulatory/permitting delays, labour shortages, supply of raw materials, & capacity constraints of Grid infrastructure - Rewiring the global economy.
Undoubtedly, concern over banking stress in the US & Europe has contributed to investor uncertainty over the pathway of interest rates and economic growth. The prospect of tighter financial conditions underpins our view that we continue to favour companies operating in resilient industries (consumer staples, healthcare) and companies with strong balance sheets (energy, materials) that offer attractive dividend yields.