According to portfolio managers, Maple-Brown Abbott, Australian small companies, Asian equities and global emerging markets are amongst the asset classes to watch, and that active management will be crucial.
Co-portfolio manager for Australian Small Companies at Maple-Brown, Phillip Hudak, commented on the upcoming Australian reporting season, remarking that it’ll be a “stock-picker’s” market with reasonable current market conditions offset by slowing economic lead indicators.
“The market pullback experienced so far this year has been driven more by valuation with downside risk to future earnings expectations going forward,” Mr Hudak said.
Mr Hudak continued by stating that “despite the negativity regarding the outlook,” the current market fundamentals are “sound” and the extent of earnings revisions across the market “doesn’t exhibit signs of any pending collapse in earnings.”
“Companies that deliver on earnings will be rewarded this reporting season with outlook commentaries being more important than ever,” he said.
“We believe value is emerging at the smaller cap end of the market given the indiscriminate selling across parts of the market.”
Key areas that Mr Hudak has drawn attention to include: rising input costs and the ability to pass on to the end customer; companies that were COVID beneficiaries and the potential risks regarding both top-line and margins reversing back to normal levels; companies showing elevated inventory levels in what is a potentially slowing economic environment; and, the effect of COVID disruptions on staff availability.
Additionally, Mr Hudak stated that companies with “low expectations that meet or slightly disappoint market earnings expectations may do well.”
“Many growth-related and consumer-exposed companies have been indiscriminately sold off and any positive news will be well received by the market,” Mr Hudak said.
Furthermore, Mr Hudak said there were also signs that “transitory” supply challenges could be easing up, now that freight costs have peaked and rolled over, along with the semiconductor chip shortages abating.
“These factors are expected to benefit those companies exposed to new vehicle and IT equipment supply,” Mr Hudak said.
John Moorhead, head of global emerging markets at Maple-Brown, stated that emerging markets in general were in a relatively strong position as well, claiming emerging markets “haven’t gone through the mass stimulus” that was seen in developed markets between 2020 and 2021.
“At the same time, central banks there started tightening earlier, and are now ahead of the curve in fighting inflation,” Mr Moorhead said.
“As a result, emerging markets currently have less of a spike in inflation to work through and a greater ability to stimulate.”
Further signs of market stability are being seen through China moving “counter cyclically to the US” and introducing small cuts to lending rates, according to Mr Moorhead. However, he still acknowledged that emerging markets cannot escape inflation entirely, and that the rising cost of living is “an issue.”
“We would expect to see consumer trade down to some more basic consumption levels and have been positioning the portfolio for this,” he said.
Mr Moorhead commented on “some big themes” that are expected to continue over the long term “regardless of the short term.” These themes include “mass consumption from a changing demographic; health care spending; the energy transition; and localisation and automation of supply chains and manufacturing.”
The Asian region forms a subset of global emerging markets which Geoff Bazzan, head of Asian-Pacific equities, claims that a recent “negative sentiment” towards Asia has produced long-term opportunities for contrarian investors.
“We believe there is a favourable risk return framework likely to reward patient capital,” Mr Bazzan said.
“The region generally remains better positioned to withstand the headwinds of the strength of the US dollar and rising interest rates compared to prior periods, such as the taper tantrum in 2013.”
Mr Bazzan attributes China’s recent outperformance to the rise in confidence that “peak pessimism has passed,” and that the negative sentiment towards China adds to “a range of existing and new China holdings” such as the heavily de-rated technology sector.
He continued by stating that Asia presents “fertile ground” for stock picking.
“We continue to identify opportunities for growing dividend income streams and other capital management initiatives as a potential re-rating trigger for the broader Asian region,” Mr Bazzan said.
“Asia is home to the world’s strongest balance sheets and is well placed to weather the impacts of many of the negative impacts affecting other emerging market regions.”
