MEDIA RELEASE: Australian companies have enjoyed one of their strongest reporting seasons in recent history helped by pent up demand, closed international borders and a second half of the financial year largely unencumbered by lockdown, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.
Mr Tadgell said the outlook for equities is also supported by encouraging signs the vaccination roll-out is gathering pace and combined with policy support remaining highly accommodative, this has helped reduce economic scarring and adds weight to future growth prospects.
“A key theme of reporting season has been the strength of corporate balance sheets. Companies have been quick to return cash in the form of higher dividends and share buybacks. With rates at record lows and a lack of alternative investment opportunities, much of this cash will potentially find its way back into equity markets.
“Too much cash chasing too few goods has been the punchline of the last 12 months. Resurgent demand colliding with supply disruption and capacity constraints has seen a surge in prices and profits for those companies able to meet demand, and asset prices more broadly”, he said.
Mr Tadgell also said reporting season highlighted how the last 12 months has shone a light on the ‘S’ pillar of ESG investing, or the social pillar, and companies’ digital resilience.
“COVID has tested companies’ relationships with employees, customers, suppliers and regulators and their ability to pivot and adapt. This has had a large bearing on whether they have survived or thrived.
“Technology and online capabilities have been critical enablers for staff to work remotely, so it’s forced every business to review its digital capability and, in many instances, accelerate technology investment plans.
“Against the backdrop of reporting season there are growing concerns growth has peaked. As the cycle matures beyond the ‘hope’ recovery phase this is not unexpected,” he said.
Mr Tadgell believes the growth phase of the market cycle still has some way to run yet and, while global growth momentum may have peaked, he remains constructive on the outlook for Australian equities.
“That’s not to say there are not emerging risks as the cycle matures. The strong rally in equity markets is seeing growing signs of fear-of-missing-out, a surge in both IPO and M&A activity, and extremes in some valuations”, he said.
Mr Tadgell said there is also the risk with vaccines becoming more universally available, policy makers are looking to scale back emergency measures. The Federal Reserve has confirmed again it is set to taper, and this could lead to higher real yields and create a headwind for equity valuations.
“Past this current lockdown, Australia is likely to be living with the virus. This is something that we haven’t experienced, and it’s uncertain how it will impact on confidence and behaviour”, he said.
Mr Tadgell said this all paves the way for a potentially higher level of volatility in coming months and requires an active approach to managing risk and capitalising on opportunities as they emerge.
“For us, it means tilting the portfolio more towards those companies who will benefit from lockdown and being active around those opportunities, but also remaining disciplined around investing in quality business where there is a margin of safety,” he said.
In recent months, the SGH20 Fund has reduced its position in the banking sector and exited RIO Tinto and added telecommunications infrastructure company, Chorus, to its portfolio.
“If you look at lifestyle diversification and the learnings from COVID lockdowns, quality cyclicals will present some good opportunities once the economy reopens and over the course of the next six to 12 months. But, as the market matures, investors need to also have an eye to capital preservation and ensuring they have enough defensiveness in the portfolio,” he said.