Demand for Aussie commodities drives up resources resilience

Yasmine Raso

Senior Journalist, Financial Newswire

19 December 2022

Australian resource companies are set to benefit from strong demand for Australian commodities and are well-positioned to outperform as our monetary policy tightening cycle continues to slow, according to Ausbil.

In its 2023 equities outlook, the fund manager said inflation is decelerating and it expects below-trend growth but not a recession in Australia.

“With Australia expected to outperform other advanced economies, and trading conditions still strong, we see some companies still capable of delivering double-digit earnings growth, even if consensus is only expecting mid-single-digit EPS growth for FY23 (S&P/ASX 200),” Ausbil’s Executive Chairman, Chief Investment Officer and Head of Equities, Paul Xiradis, said.

“Good Australian listed companies on average still have strong balance sheets, relatively low gearing, and enjoy an active and targeted consumer (particularly in leisure, travel and other service experiences).

“Looking ahead, there are a number of secular themes driving activity and sustaining higher inflation. These include decarbonisation and the shift to renewable energy, the shift from globalisation to regionalisation, sovereign security and energy surety.

“These drivers, including the expected strong post-COVID Chinese recovery in 2023, are very supportive for a range of commodities in which Australia is dominant, providing a platform for higher commodity prices and hence earnings for the wider resources sector.”

The manager also signalled an opportunity in “quality leaders” across various sectors to provide earnings growth, as they have “relatively low elasticity of demand and can pass on the costs of inflation”. As the economy slows, opportunities also lie in businesses with limited competition but large pricing power in consumer staples, healthcare or specialist real estate.

“Market volatility, and concerns around inflation and rate rises remain an issue, but some clear caution in the rhetoric of central banks has given some hope that the hard steps may have already been taken in the battle against inflation,” Xiradis said in the outlook.

“We are expecting more caution, perhaps even a pause in 2023, around rate rises as central banks look at the data for feedback on how successful they have been to date in the arrest of inflation. That said, we believe the bulk of the monetary tightening has already occurred.

“In terms of preparing our thinking, 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?

“Regardless, 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 FY23.”