With economic growth harder to come by in 2024, so will be the case for earnings growth, Ausbil has said in its latest reading of the economy.
Noting FY2023’s “growth pause”, wherein earnings per share (EPS) growth in FY23 was slightly down compared to FY21 (30 per cent) and FY22 (21 per cent), Ausbil sees earnings growth for FY24 at a similar level to FY23.
“If FY23 could be described as a ‘growth pause’ in earnings, we would suggest FY24 will be another flat year of earnings growth that can best be described as a ‘consolidation’ as balance sheets and P&Ls normalise for a future where interest rates are more normal, and only genuine growth in earnings matters,” the firm said.
“In aggregate terms, the market is expecting negative earnings growth to 30 June financial year 2024.”
However, Ausbil projects that earnings growth can be achieved in some sectors in 2024 through key quality opportunities.
The sectors to keep across
According to the investment manager, the market is wrestling between a negative view on the back of household spending and a positive outlook that may see households adjusting thanks to economic resilience and a cushion of excess savings.
While maintaining a cautious stance, Ausbil is favouring earnings growth from GDP agnostic sectors and stocks, alongside “quality leaders with demonstrated operational and pricing leverage”.
In the non-resource sectors, the firm said better earnings growth outcomes will most likely be found in health care, technology, telecommunications, commercial services, and to a lesser extent, the banking sector.
On the other side of the coin, higher interest rates and consequent rising funding costs have had an adverse impact on structured and highly leveraged businesses.
“Sectors that had been impacted by the sustained higher rates included infrastructure, through the long duration impact on cash flow income streams; and REITs, through rising cap rates, lower occupancy rates, higher funding, and high levels of indebtedness relative to adjusted lower NTA,” Ausbil noted.
However, the investment manager acknowledged that value is also emerging in quality REITs, particularly those with exposure to data centres and housing given population growth, with some names within the infrastructure space offering value following the recent downward adjustment in prices.
Meanwhile, Ausbil sees technology as a potential earnings rerate in FY24 on the back of rising rates having “punished” some of the sector in 2022.
As most technology names are long duration growth assets, Ausbil added, the impact will be variable.
“We expect pressures on valuation multiples overall, particularly for non-profitable tech stocks. We are selective, and favour tech with underlying sustainable cash flows with strong and growing earnings,” the firm concluded.
