“Post-pandemic” normal not here yet

Yasmine Raso

Senior Journalist, Financial Newswire

23 September 2022

While some parts of the Australian sharemarket have born the full brunt of rising interest rates, inflation and cost of living, other sectors and stocks that have travelled light so far are expected to feel the burn over the next 12 months.

The forecast from Phillip Hudak and Matt Griffin, Co-Portfolio Managers of Australian Small Companies at Maple-Brown Abbott comes as they said some segments of the market are still in early stages of a “downgrade cycle”.

“It follows a pullback in earnings expectations for FY23 during the most recent reporting season,” Hudak said.

“The Australian market is at an interesting juncture, with the shift to the new “post-pandemic” normal well underway; however, the end point is still uncertain.

“In particular, the impact of higher interest rates and rising costs is yet to fully play out, and in this context, Australia seems to be 6 to 12 months behind the rest of the world.

“The opportunity for investors is to find those companies with structural growth stories and industry tail winds that are well placed to withstand any future downturn, and we believe that active management will be key to this.”

Hudak and Griffin also noted several aspects that are making companies more attractive in the current environment, including “exposure to industry tailwinds and structural growth stories” and “pricing power to offset cost inflation”.

“Companies that can maintain margins and profitably should continue to perform well for investors,” Griffin said.

“The retail sector has been holding up well but we believe this reflects the fact that most people still have a good savings buffer and haven’t started to cut spending.  As a result, the impact of the rising cost of living hasn’t yet flowed through.”

“The lead up to the Christmas shopping period will therefore be crucial for the retail sector.  Inventory levels look elevated and continue to rise, as a result of concerns about supply chain risk which has led a number of retailers to order well in advance to have stock on hand.

“However, purchasing decisions and forecasts may be based on last year’s Christmas sales which were very elevated. This means there is a big risk if demand slow, as those retailers with a high inventory level will need to discount heavily which will hit margins and profitability. We’re starting to see this in global markets already.”