Featuring Hugh Giddy & Daniel Moore



Portfolio Managers, Hugh Giddy and Daniel Moore, discuss the market’s performance during February 2023, the reporting season and the performance of the IML funds.

Edited transcript

Hugh: February was a somewhat weaker month after a very strong start to the year in January where markets around the world rose by about 6%, which is an extraordinary monthly return. In February, the World Index was down almost 2% and the Australian Index was down 2.6%. With that, it was very pleasing to see our main Australian share fund up 0.3%. It’s always pleasing to have a positive month when the markets are negative. There does seem to still be some high degree of optimism around what is possible for central banks to do. They’ve got things mostly wrong in the last few years, but markets seem to be backing them to create a soft landing whereby inflation is brought under control without much of a recession, much unemployment, or much real hurt to corporate earnings.

Daniel: Yeah, that’s right Hugh, and looking closely at reporting season, it was pretty mixed, I think, is probably a fair statement. Looking at the headline results, revenue was very strong, but when you looked a little bit more deeply, most of that was driven by price and many companies had negative volume growth. Indicating some degree of weakness.

Hugh: Some consumer pushback.

Daniel: Yeah, definitely.

Hugh: For those high prices.

Daniel: Yeah, even in supermarkets. Costs were obviously rising across the board – that was pretty consistent – and then when we looked at what were sort of the good results versus probably the more average results, the companies that stood out had good pricing power and were able to have their costs somewhat under control. And then looking at outlook statements, there was some signs of weakness, particularly at the more pointy end, the consumer discretionary stocks. We saw, some pretty weak results in January/February from JB Hi-Fi, Harvey Norman in particular, sales were down 10% in January. So, a bit of weakness there.

Hugh: Yeah. Well, reporting season, obviously, the market was down overall, and it was driven a bit by a bit of concern about the banks, which do seem to have been bought up in the expectation that they would do well with their interest margin and CBA pointed to a probable peak in net interest margins even though interest rates are still forecast to rise. In our portfolio, we did have a couple of weaker stocks with Aurizon and Fletcher Building both down for the month with somewhat disappointing earnings. But when you look at the source of the disappointment, a lot of that relates to weather, which is unlikely to repeat. Aurizon – the coal shipments were weak because of flooding in Queensland, and Fletcher Building pointed to the Auckland floods which have been quite extraordinary, hurting their second half earnings.

Daniel: Yeah. On the positive side, I think we probably had one of the best reporting seasons we’ve had in our history. We had many, many good results. But if I had to pick one highlight it’s probably Medibank, I think. The stock was up 14% for the month, And it’s a stock we’ve been buying on weakness actually, post the cyber incident late last year. Pleasingly, with the result, it showed they’d barely lost any customers, which was pretty incredible and showed how strong the brands are for that business, and they had 6% profit growth, which was a great result, but there was many others. Brambles was up 7%, their profits were up 25% on a constant currency basis. Lottery Corp had a great result that was up 10%. Steadfast had a good result. Even Telstra continues to perform really well and probably the highlight of that result was their Op Ex growth. Their cost growth was only 1.6%, that would have been probably the best result of reporting season on the cost side. So lots of good results for the fund.

Hugh: And good to see in the mobile market, we are starting to see the players lifting prices, that saying, that we were talking about a few years ago as we went around saying: “This is an irrational market, they have to raise prices.” and they have been doing so and you’re starting to see a rise in average revenue per user. So, if we look forward, it is an environment where there seems to be a lot of optimism, as I mentioned, about central banks pulling a rabbit out of the hat, and we think companies will have a tougher time. You’ve already seen that a bit in the outlook statements, and we think that caution is warranted. So it really is a time to be selective because there will be companies that can navigate higher inflation and cost pressure and possibly pressure on volumes, and there’ll be others that really fall at the first obstacle.

Daniel: Yeah, no, that’s right. And the good outlook statements we’re getting from the companies we own definitely gives us encouragement. And sort of looking forward at this sort of uncertain environment going forward we have a webinar coming up on the 15th of March, where Bruce Du and I will be talking about a number of the companies in the fund and why we think they’re very well placed, in what could be tricky times ahead, and we’ll be going into a bit of detail on those investment cases. So, put that one in the calendars.


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