Investor Update - May 2023
The ASX 200 declined 2.5% in May as Banks and Resources, the bell-weather sectors of the Australian equity market, weighed heavily on market returns. The 1H23 bank earnings results highlighted the near-term outlook remains challenging. The initial benefits of higher interest rates on bank net interest margins (NIMs) have been diluted by elevated competition for deposit and mortgage customers. A more cautious outlook for earnings and returns for the banks has further contributed to its relative underperformance.
While the sell-off in resource stocks reflects rising recessionary concerns in the West and a weaker than expected economic recovery in China. The initial enthusiasm for a recovery in commodity prices from China’s re-opening out of the pandemic has been dampened in the short-term by disappointing domestic manufacturing and employment data suggesting a more sluggish economy. The energy sector has also not been immune to recessionary concerns over a weaker outlook for global industrial production.
In sharp contrast, optimism towards the technology sector’s improving growth outlook and futuristic benefits of Artificial Intelligence (AI) underpinned the outperformance of growth stocks relative to value stocks over the month.
At a portfolio level, Industrial and Healthcare sectors led by Cleanaway Waste Management, CSL, and Integral Diagnostics were notable strong performing stocks. Whereas BHP, Ramsay Health Care, and Amcor weighed negatively on performance.
Undoubtedly, there has been a material divergence in performance within the Healthcare sector. CSL’s share price outperformance over the last year ~+15% relative to the ASX 200 ~+1% has been underpinned by a robust recovery in its plasma therapies division. CSL’s plasma collection volumes are up ~30% year-on-year, providing a welcome uplift in operating margins. With initiatives to further improve productivity and operating leverage, CSL remains well placed to deliver double digit earnings growth over the forecast period.
Ramsay’s 3Q23 update highlighted a more challenging operating environment. While there has been a solid recovery in elective surgical admissions in Australia and the UK, ongoing cost headwinds relating to labour availability and wage inflation, have impacted operating margins. Over the medium term we believe Ramsay should be a beneficiary of a continued recovery in surgical volumes and momentum returning in its non-surgical categories driven by ageing demographics and chronic disease.
The recent US and Australian reporting periods have highlighted that corporate earnings remain relatively resilient despite the impact of rising interest rates. Earnings growth is expected to slow over the remainder of calendar 2023, but still record low single digit eps growth. The ASX 200 is trading on a 12-month-forward price earnings ratio (PER) of ~14.5 times, and dividend yield of ~4.3% (around their 30-year average). While the ASX 200 is neither ‘cheap’ nor ‘expensive’ on historical metrics, we continue to be mindful that the backdrop for global economy suggests a further slowing in activity. Our portfolio remains positioned in the key sectors of defensive Industrials, Healthcare, and Materials, all of which continue to offer favourable long-term prospects.