Investor Update - October 2022
Global equity markets staged a dramatic recovery in October, reversing much of the declines from the September low point. The ASX 200 rallied 6.0% in October led by the retail banks benefiting from the rapid rise in cash rates.
Overall, the strongest performing sectors were Banks (+14.5%), Energy (+9.5%), and Real Estate (+9.3%), whereas Consumer Staples (-0.2%) was the worst performing sector in October.
For the portfolios Northern Star, Spark NZ, and Waypoint REIT positively contributed while Medibank, Integral Diagnostics, and Cleanaway were the key detractors.
A notable observation of first quarter 2023 reports and AGM commentary is that companies have made a solid start to the year but the outlook points to slower demand.
There are tangible signs that global supply chain pressures have started to ease due to weakening activity. A key theme from the 1Q23 updates from Amcor and Brambles highlighted that operational momentum has started to slow as consumer companies begin to de-stock from the elevated levels built up over the pandemic.
A regrettable development over the last month has been the exposure of significant cyber- attacks on Corporate Australia that resulted in disclosure of their customers’ personal data. The most prominent data breaches related to:
On 22 September 2022, Optus notified customers of a material breach of customer data.
On 13th October 2022, Medibank reported a cyber-attack resulting in a data breach (Held in Income Portfolio).
On 27th October 2022, Medlab Pathology (acquired by Australian Clinical Labs) notified the ASX of cyber security incident that involved the personal information of Medlab’s patients and staff.
The cyber-attack on Medibank has forcefully illustrated how difficult these incidents are to deal with. In the near term we expect MPL’s share price to be impacted by negative investor sentiment until the full extent of the cyber breach has been understood. Nevertheless, the impact on consensus earnings remains modest with MPL trading on ~16 times and dividend yield ~5% on FY23 estimates providing valuation support.
The outlook provided by companies has raised concerns that tightening financial conditions have increased the risk of earnings downgrades as we head into the new year. In an environment where slowing growth poses a key risk to earnings, we conclude that it makes sense to maintain our overweight positions in industrial defensives, energy, healthcare, and telecom stocks.