2023 a “tale of two halves”: Ausbil

As market commentary continues to revolve around the impending “fixed rate cliff” set to put more pressure on Australian mortgage holders, there may be a light at the end of the tunnel as certain sectors and companies show strong growth signs.

Co-Portfolio Managers of Ausbil’s Australian Small Cap fund, Arden Jennings and Andrew Peros, said quality industrials have signalled strong earnings growth, alongside the resources and energy sectors that have adapted to demand for the decarbonisation thematic, copper, nickel and rare earths.

They also flagged sectors such as construction, retailing, some consumer discretionary and housing that are “over-exposed to slowing economic growth” and companies whose earnings have been affected by inflationary pressures.

“We think inflation has peaked. As we see it slow, we will need to consider the post-inflation positioning for our portfolios. In the ex-100 space, there are many names that we expect will experience an element of re-rating in 2023 as rate rises end, and the market stabilises with falling inflation,” they said.

“Today is when we need to be considering what sectors will benefit as inflation falls back, when central banks have ceased raising rates, and looking for the seeds of the next expansion. The complex issue is, when does this occur?

“While we believe earnings growth in 2023 will undershoot the last two years, there are companies with earnings upside that are yet to be appreciated by consensus. There are also quality leaders whose earnings are immune to the vagaries of the cycle. This is where we are seeing the potential for outperformance in financial year 2023.”

Jennings and Peros also said considering environmental, social and governance (ESG) criteria in the investment process has had a positive impact on assessing companies’ earnings sustainability and making well-informed investment decisions.

“Decarbonisation as an answer to climate change is a fundamental secular theme that we expect to drive markets in the coming decades, at least until we have achieved net zero climate targets. Renewable energy and the key commodities that benefit from the electrification-of-things are looking towards years of demand that outstrips supply,” they said.

“Ausbil remains positive on the outlook in key metals given low levels of inventory, support from ongoing economic growth in China, and from the long structural themes of decarbonisation, renewable energy and energy security, and technology-driven changes in how we live, such as the electrification-of- things, and the shift to electric vehicles.

“The ex-100 space is replete with small companies that are positioned to capture the drive to decarbonisation. With Ausbil’s Global Resources team, we benefit from specialised knowledge that many ex-100 strategies cannot access. This adds significant alpha potential to the strategy given the size of Australia’s listed resources market.”