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Portfolio manager’s FY2023 warning: Brace for ‘confession season’

By Rhea Nath
4 minute read

Amid ongoing market uncertainty following a six-month rally, Tribeca Investment Partners anticipates a cautious tone in corporate commentary as firms aim to temper potential earnings disappointments.

As investors approach the end of the 2023 financial year, Jun Bei Liu from Tribeca Investment Partners has cautioned about low earnings in the current cycle, anticipating a growth pickup later in the year.

In the latest monthly report for its Alpha Plus Fund, the lead portfolio manager suggests that the Australian equity market is poised to enter a period of uncertainty following an almost six-month rally since October last year.

As of April 30, the fund’s performance has declined to -3.63 per cent in the last month compared to its benchmark, the S&P/ASX 200 Accumulation Index, which saw a decrease of -2.94 per cent. However, over the past year, the fund has delivered a return of 12.98 per cent, outperforming the benchmark’s return of 9.07 per cent.

“After a near six-month one-way trade, the Australian equity market is entering a more uncertain period as expectations for rate cuts get wound back and fears of stickier-than-expected inflation push long bond yields higher,” Liu observed.

“While these shifts are, in part, a reversal of interest rate cut expectations and the pace of progress on lowering inflation that had simply become unrealistic, they do represent a softening in the near-term tailwinds for the equity market, post the 17 per cent rally since the start of October.”

Consequently, Liu said that the next few months are expected to witness the market embroiled in a “tug of war” between strong cyclical tailwinds fuelled by resilient economic growth against RBA rate hikes, and increasing headwinds posed by rising long bond yields and the possibility of inflation prompting a more hawkish stance from the RBA.

This may lead to additional uncertainty in the short term, although she refrained from labelling it as a “particularly bad backdrop”, citing the resilience of the labour market. Liu also noted that markets should brace for a “confession season” as companies work to lower expectations in the remaining months of the fiscal year.

“Given softness in some areas of the economy, continued cost pressures and the desire to avoid earnings disappointments, we’d expect a very cautious tone to corporate commentary over coming weeks if not months,” she said.

Liu’s outlook is not entirely pessimistic, as she believes that corporates are likely to benefit from reduced input prices compared to peak rates in late calendar year 2023. This could lead to positive impacts on profit margins, especially when coupled with effective cost control measures.

Overall, she forecasts a period of consolidation over a prolonged sell-off.

“We believe that there remains a strong desire to buy the dips, and this will help put a floor in the market should near term concerns rise,” she explained.

“At this stage, we maintain our view that the market will be supported by cyclical improvement and by some easing in financial conditions. Investors should remain focused on cyclical upside rather than betting on rate cuts which remain hard to determine and very data dependent.”

Liu added: “Now is the time to be laser focused on where high conviction views sit, rather than being overly tied into negative developments.”

Last week, Platypus Asset Management’s head of investments, Prasad Patkar, opined that 2024 looked to be a stock picker’s market, much like 2023, although this could “turn on a dime”.

“You could get a bad inflation print tonight, suddenly yields spike and everyone forgets the bottom-up and returns to macro again – but so far, so good on that front,” Patkar told audience members at the Stockbrokers and Investment Advisers Association (SIAA) 2024 Conference in Melbourne.

As investors continue to gauge where inflation and interest rates may land this year, Patkar described Platypus AM’s outlook as “reasonably constructive”.

“There’s nothing so far that suggests the wheels seem to be coming off in the economy. I think it would be fair to say people were expecting a recession at the back end of 2023, in the middle of 2023, but it keeps getting pushed out, so I suspect there’s a lot of underlying strength in the economy, probably driven by consumer in the Western world,” he said.

He forecasts this to continue carrying the economy “for a little bit longer”, though spending is expected to eventually be curbed as interest rates begin to pinch.

Looking ahead at the next reporting season in August, Patkar said it will be benign.

“If I had to take a very short-term view, [it] should be benign. We expected February to be benign, it was, and I suspect nothing dramatically different about August. If the economy holds up reasonably well, February next year might be similar,” he said.