The recent market downturn has created challenges but is also resulting in attractive opportunities for investors, according to portfolio managers from Maple-Brown Abbott.
Australian small companies, Asian equities and global emerging markets are among the asset classes to watch, and active management will be key, they say.
Phillip Hudak, co-portfolio manager for Australian Small Companies at Maple-Brown Abbott, said the upcoming reporting season in Australia will be a stock-picker’s market with reasonable current market conditions offset by slowing economic lead indicators.
“The market pullback experienced so far this year has been driven more by valuation with downside risk to future earnings expectations going forward. However, despite the negativity regarding the outlook, current market fundamentals are sound and the breadth of earnings revisions across the market doesn’t exhibit signs of any pending collapse in earnings. Companies that deliver on earnings will be rewarded this reporting season with outlook commentaries being more important than ever.
“We believe value is emerging at the smaller cap end of the market given the indiscriminate selling across parts of the market,” he said.
Mr Hudak says some key areas for investors to keep an eye on include:
- rising input costs and the ability to pass on to the end customer
- companies that have been COVID beneficiaries and potential risks regarding both top-line and margins reversing back to normal levels
- companies with elevated inventory levels in a potentially slowing economic environment
- the impact of COVID interruptions on staff availability.
“The companies that are likely to be better placed this reporting season include those that are inflation beneficiaries; companies with pricing power; those that have defensive earnings streams; those that are exposed to industry tailwinds; and those that have cost-out strategies to offset any slowing top-line growth.
“In addition, companies with low expectations that meet or slightly disappoint market earnings expectations may do well. Many growth-related and consumer-exposed companies have been indiscriminately sold off and any positive news will be well received by the market.
“There are also signs that ‘transitory’ supply challenges may be easing with freight costs having peaked and rolling over in addition to semiconductor chip shortages starting to ease – these factors are expected to benefit those companies exposed to new vehicle and IT equipment supply,” Mr Hudak says.
John Moorhead, head of global emerging markets at Maple-Brown Abbott, said that emerging markets generally are also in a relatively strong position.
“Emerging markets haven’t gone through the mass stimulus that we saw in developed markets in 2020 and 2021. At the same time, central banks there started tightening earlier, and are now ahead of the curve in fighting inflation.
“As a result, emerging markets currently have less of a spike in inflation to work through and a greater ability to stimulate. We're even starting to see some loosening coming in, with China moving counter cyclically to the US and introducing small cuts to lending rates, looking to stabilise the market and improve consumption.
“However emerging markets can't escape inflation entirely, and the increasing cost of living is an issue. We would expect to see consumer trade down to some more basic consumption levels and have been positioning the portfolio for this.
“Despite the current macroeconomic situation, there are some big themes that will continue over the longer term regardless of short-term sentiment. In fact, the sell-off that's happening now has helped us to identify opportunities that are going to benefit from those longer-term themes at really good valuations.
“These themes including mass consumption from a changing demographic; health care spending; the energy transition; and localisation and automation of supply chains and manufacturing,” Mr Moorhead says.
Looking at the Asian region, which forms a subset of global emerging markets, Geoff Bazzan, head of Asia Pacific equities, says an overly negative sentiment towards Asia in recent years has provided a long-term opportunity for contrarian investors.
“We believe there is a favourable risk return framework likely to reward patient capital.”
“The region generally remains better positioned to withstand the headwinds of the strength of the US dollar and rising interest rates compared to prior periods, such as the taper tantrum in 2013.
“The recent outperformance of China is providing some confidence that peak pessimism has passed. We have used this period of extreme negative sentiment towards China to add to a range of existing and new China holdings including among the heavily de-rated technology sector.
“Overall, Asia remains fertile ground for active stock picking, with a long list of non-benchmark stocks and still elevated valuation dispersions likely to provide a tailwind for active value-based stock picking.
“We continue to identify opportunities for growing dividend income streams and other capital management initiatives as a potential re-rating trigger for the broader Asia region. Asia is home to the world’s strongest balance sheets and is well placed to weather the impacts of many of the negative impacts affecting other emerging market regions,” says Mr Bazzan.
This material does not constitute investment advice or an investment recommendation of any kind and should not be relied upon as such. This information is general information only and it does not have regard to any investor’s investment objectives, financial situation or needs. Past performance is not a reliable indicator of future performance. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions.