Are fund managers complacent ahead of an earnings season where companies are likely to offer little in the way of formal earnings guidance for the year ahead?
Industrial property giant GPT Group set the tone early on Monday when it withdrew its profit and distribution guidance for calendar 2021, citing the uncertainty created by lockdowns in Sydney and Melbourne.
Relaxed approach
Mark Freeman, a market veteran of 30 years and chief executive of Australia’s oldest listed investment company, Australian Foundation Investment Company, believes the market’s relaxed approach to the crisis is justified for three reasons.
First, this isn’t like 12 months ago, when investors could only hope that effective vaccines would be developed to get economies open again. Australia’s vaccine rate may be far too low, but the market knows it will eventually rise and the experience of 2020 says the economic rebound could be swift and powerful.
Second, equities remain attractive in a world of ultra-low interest rates. Even if inflation eventually forces rates higher, “the reality is they are incredibly low and people just don’t have anywhere else to put their money”.
Third, and perhaps most importantly, listed companies are not feeling the same level of pain as smaller businesses that bear the brunt of economic shutdowns.
Freeman points out that about 40 per cent of profits of companies on the ASX are generated offshore, insulating them from the worst of the lockdowns.
Limited influence
The financial services sector accounts for about 26 per cent of the ASX 200 but only about 10 per cent of the broader economy; resources account for 19 per cent of the index but about 9 per cent of the economy,
Smaller, local businesses have fewer options and are being hit hard. But their influence on ASX stocks is limited, Freeman says.
“The construct of equity markets is actually quite different to the economy as we see it,” he says.
Further, the lesson from 2020’s lockdowns is that larger companies with national operations can pivot quickly to remote working, keeping their core operations going and their cash flowing.
Even those ASX businesses most exposed – retailers, for example – found ways to pivot to alternative sales channels to weather the storm.
Domestic disruption
Still, Freeman is alive to the prospects of some level of short-term domestic disruption. And he’s worried that valuations have become stretched, including in sectors of the market AFIC owns.
But he’s confident that the traditionally conservative portfolio of listed investment companies focused on quality names with strong balance sheets, dominant market positions and good management – including the big banks, Rio Tinto and BHP, Wesfarmers, Coles and Woolworths, plus a group of founder-led business that have proved resilient through cycles, including ARB Corporation, Mainfreight, Reece and ALS –…
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