Airlie says it’s time to get ‘uncomfortable’ with Australian stocks

But the fact that Australia’s housing market is dominated by adjustable rate mortgages should mean that rate hikes have a bigger effect on the economy faster than in other countries, meaning the Reserve Bank may not have to strain. as much as it should.

On top of that, Fisher says corporate balance sheets in Australia are “in better shape than in any other downturn we’ve seen”, giving local businesses great flexibility to navigate any downturn.

“We think that if we head into a more difficult period, the Australian economy will probably do relatively well.”

Matt Williams, Fisher’s fellow portfolio manager at Airlie’s Australian Share Fund, says he was generally quite impressed with the results achieved during the August reporting season, nominating private health insurer Medibank, Reece plumbing and building products giant James Hardie as the firms that delivered the highest quality results.

Dominant narrative with price

While dividends were a bit lower than Williams expected, possibly because companies showed sensible caution about the outlook, he says the ability of companies to pass on higher prices and maintain margins was impressive, and the The general picture was that of an economy in excellent health. , despite all the concerns about rate hikes hurting growth.

“We do a good job of convincing ourselves to go into recession,” Williams notes wryly.

“We think things are going to get tougher, there’s no question they have to because the top line and the cost line are under pressure. But the consumer in both Australia and the US looks pretty good on the whole and corporate balance sheets are really good on the whole.”

The Airlie Fund is down 2.9% over the last 12 months, versus a 2.2% drop in its benchmark, while over three years it is up 9.4%, versus a 4% gain. .3% for its reference index.

Williams and Fisher will participate this week in a national tour that will allow them to receive financial advisers at face-to-face events for the first time since 2019.

The message will be simple: don’t let the dominant narrative of the markets overwhelm you.

“The thing about the mainstream narrative is that we love it, especially when you’re in these really macro-driven markets like we’ve been for the past year. Because if it’s grabbing headlines, it’s probably creating opportunities,” says Fisher.

“He’s not saying that the dominant narrative of, say, economic turmoil is wrong and that it’s not going to happen. He is saying that he has been more than valued in some stocks, in some sectors.”

The pair are wary of the kind of defensive stocks that have become wildly popular in recent months, a list that includes Brambles, Woolworths, Coles and Telstra.

“It can be tempting when you’re worried about where the cycle might want to hide in defenses,” says Fisher.

“The challenge you have is that the defensive, safe, boring part of the market has re-rated. So now he’s faced with this choice between, in some cases, glaringly expensive defensive companies and bombed-out consumer-facing companies that look tantalizingly cheap, but where he recognizes the profits are probably too high.

“You have to have a playbook on how to navigate both sides of the market.”

The fund has some of those defensive names, including Woolworths, Wesfarmers and CSL. But Fisher says investors need to think carefully about which defenses to back.

“If we find ourselves in a more inflationary environment than we’ve been historically, you’ll want to look at the capital intensity of the business model,” he says.

“So a lot of those companies like Telstra or Brambles, they’re spending billions of dollars a year on sustaining capital expenditures and that’s going to cost even more every year in an inflationary environment.

“They are running harder to stay put and you are paying more for them now than a year ago. That, to us, doesn’t scream good value.

“We are happy to still have Medibank, even though it has performed well because it has the kick of high interest rates in terms of its investment income, and it is a low-capital business model. So it shouldn’t be too affected by inflation.”

But Williams and Fischer are also looking for pockets of value among hard-hit stocks, including in consumer-facing businesses, which the mainstream narrative says are having a tough time.

“Our playbook is to really focus on the balance sheets of these companies. Because the market is probably right that earnings are too high, but valuations have now priced it in,” says Fisher.

“If you’re looking for consumer discretionary-oriented businesses, you want to have businesses that are pretty much net cash or own a lot of property.”

Williams nominates two companies that fit this bill: Nick Scali, which is down more than 30 percent so far this year, and Premier Investments, which is down 32 percent.

One of the big concerns of the August reporting season was the buildup of inventory at retail companies, which have spent much of the past two years struggling to secure stocks amid supply chain shortages.

Williams is confident that blue-chip retailers will be able to fix any inventory issues, but he’s keeping an eye out.

“If Christmas isn’t as good as they may be expecting, the retailer will have to shift that stock and ship it at a price that may not be as attractive. So that’s what we’d be looking for,” he says.

Another consumer-facing business Fisher mentions is ARB, the four-wheel-drive accessory maker that has long been a favorite of fund managers. The stock is down 45 percent this year, but to Fisher it is an example of a quality business trading at a reasonable valuation for the first time in a long time.

Finally, Williams remains interested in the lithium sector and, in particular, in mineral resources. While there is no shortage of speculation in the sector, Williams says demand appears strong.

“OEMs (original equipment manufacturers) tell you what they’re doing in terms of tools for electric vehicles. But it doesn’t depend so much on China either.”

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