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Martin Currie warns of hard landing for Australia

Yasmine Masi26 March 2024
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Martin Currie Australia has bucked the prevailing ‘Goldilocks’ view of Australia’s economy after results from the latest reporting season indicated a hard landing could still be possible.

Chief Investment Officer, Reece Birtles, said the firm’s analysis of the latest reporting season information suggested “more pain ahead and the path is edging closer to a hard landing”. This comes as Australia’s 2023 real GDP reading of 1.5 per cent p.a. was its third-worst figure in 30 years after 2020’s mid-COVID reading and 2000’s post-tech bubble reading.

“The deteriorating state of the consumer, flatlining retail sales and falling company cashflows are the biggest risks to the downside. And the relief that things were ‘not as bad as feared’ has masked the extent of this deterioration,” he said.

Birtles said the excess savings buffer consumers built during the COVID pandemic has been almost depleted by higher interest rates and cost of living expenses.

“With these [savings] buffers almost gone, the real stress is now likely to show which will also reveal itself in falling cash flows for companies.”

Birtles highlighted Australian stocks with “defensive earnings, robust cash flows, strong balance sheets and cost control in sectors like telecommunications, healthcare, insurance and infrastructure” as the winners during this period.

“For some time, we had positioned our portfolios for the hard landing scenario. We have lowered the beta of our portfolios and are focused on companies that can grow earnings and dividends and have lower valuation risk,” he said.

“Medibank Private is a good example of this, with earnings stability and resilience from a superior industry position, light capital intensity and high cash flow resulting in consistently strong profit margins. We think that defensive inflation protection or stagflation protection is going to be quite important in a hard or soft landing scenario.

“Stocks like Telstra Group, an essential service, and Aurizon Holdings excel in that protection with very resilient volumes and good pricing power, and in the case of Aurizon, inflation-linked returns.

“Under a no-landing, stronger for longer growth theme with higher rates, exposures to insurance stocks such as QBE Insurance Group and Suncorp Group do offer positive leverage.

“In all scenarios we also want to own names such as Worley, which we think has a compelling exposure to the energy transition, with 80% of their new business now in sustainability-type work in resources.”

Birtles said the firm also consulted with executives and management teams from the companies to form its views.

“Over the four-week reporting period, our investment team conducted more than 100 meetings with company management teams following the release of results, and this on-the-ground research has helped us to refine our investment views and outlook,” he said.

“In summary, we believe that now is the time for investors to evaluate the balance in their portfolios. It is important for investors to be discerning in their stock picking and focus on the companies which have pricing power, resilient volumes, and capacity to manage margins, while avoiding stocks with valuation risk.”

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