Rudi’s View: Outlook Negative, With Plenty Of Silver Linings

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Sep 06 2023

In this week's Weekly Insights:

-Outlook Negative, With Plenty Of Silver Linings
-Conviction Calls & Best Ideas

By Rudi Filapek-Vandyck, Editor

One of the stand-out features of the August results season has been the resilience of household spending in Australia, which proved pivotal in keeping the balance of the season skewed towards not-as-bad-as-feared outcomes from discretionary retailers in particular.

But to me the bigger issue that surfaced throughout the month was how vulnerable our traditional defensives turned out to be in the face of higher input costs, skilled labour shortages, rising wages, rent increases, and costlier debt.

Ahead of August, I worried about extreme volatility and relentless punishment in case of perhaps only mild disappointments. That inkling has certainly been proven correct. On UBS's assessment, August 2023 has been one of the most volatile and challenging reporting seasons in local history.

And traditional defensives have played an active, prominent role in contributing to August's notable spike in share price volatility as the likes of Coles Group ((COL)), Endeavour Group ((EDV)), Ramsay Health Care ((RHC)), Transurban ((TCL)) and Telstra ((TLS)) all managed to disappoint one way or another, leading to immediate selling pressure once their financial results had been communicated.

As a group, Defensives have largely trod water post covid and lockdowns, and some, including Coles, Ramsay Health Care and APA Group ((APA)), have no doubt left many a loyal shareholder with a sense of dissatisfaction as shares are today trading at levels last seen during pre-covid years.

This is quite remarkable and I suspect surprising to most investors and share market strategists given the rapid reset in global bond yields and central bank cash rates over the past 20-plus months, triggering widespread anticipation of much slower growth ahead for economies across the globe.

In such an environment, Investing 101 tells us defensive assets and businesses should be on investors' target list to preserve capital, secure income, avoid major disasters and still achieve at least moderate capital gains.

But this time around the overall defensive experience has been underwhelmingly mixed at best, and that's assuming portfolios were not overly exposed to Coles, Ramsay Health Care or ResMed ((RMD)) which recorded share price falls of respectively -12%, -12%, and -24% just in August.

It remains yet to be seen whether disappointment to date makes investors more apprehensive towards this segment on the local share market. Post August, corporate Australia is forecast to be en route for negative profit growth, on average in aggregate, and for less dividend payouts over the twelve months ahead.

Not exactly an environment in which defensives cannot or won't make a come-back, especially given most of the post-covid headaches are seen to be reducing already.

Within this context, I note model portfolio managers at Wilsons recently added Amcor ((AMC)), believing those shares are now poised for outperformance as the valuation looks attractive and further downside for earnings is seen as unlikely.

(Un-)Healthy Healthcare

Apart from supermarkets, the country's largest telco and utilities, the local healthcare sector has been for many years the logical go-to destination on the ASX when times became tougher, but healthcare yet again produced multiple prominent disappointments this August season.

ResMed, the world's number one manufacturer of CPAP devices assisting people with sleep apnoea, missed market forecasts by some -5% on slower-than-anticipated margin recovery, but its share price has undergone a seldom witnessed de-rating (-24%) as hedge funds and shorters in the US, where the shares are also listed, play winners and losers from immensely popular anti-obesity drugs marketed by Eli Lilly and Novo Nordisk.

Analysts covering the company and its sector believe the assumption that sleep apnoea is simply a result of obesity and that ResMed's growth will be stunted because of popular weight-loss pills is misplaced and misguided, but most investors will be hesitant to catch the proverbial falling knife, instead biding their time and see when exactly those shares find support.

An equally dramatic de-rating has taken place for private hospital operator Ramsay Health Care, long considered to be a Quality backbone stock for investment portfolios throughout Australia. But the long term uptrend on historical price charts has flatlined since 2016, with last month's sell-off pushing the shares to their lowest level since 2014.

Ramsay's disappointment in August has left analysts with a veritable smorgasbord of questions, ranging from the sustainability of higher operational costs (permanently lower margins?), to the hospital operator's true negotiating power versus health insurers, the need to diversify into costly out-of-hospital care, and the company's viable options when governments feel the pressure of budget constraints.

Ramsay's balance sheet is also burdened by a mountain of debt, so no surprise the company is intending to find a buyer for its Asian JV, Ramsay Sime Derby, to provide relief.

Though the shares look on most assessments undervalued, assuming some kind of normalcy can return in due course, Ramsay Health Care has very few Buy-rated believers left among healthcare analysts in Australia. Most experts don't see a quick fix on the horizon, though a sale of Ramsay Sime Derby might be positively received, and prefer to wait-and-see what the future brings along.

Ten times bitten, twelve times shy?

With the notable exception of high quality, small cap superpower-in-ascendency, Pro Medicus ((PME)) and large cap Cochlear ((COH)), healthcare was one sector mostly on the receiving end in August.

All of Ansell ((ANN)), APM Human Services International ((APM)), Audeara ((AUA)), Australian Clinical Labs ((ACL)), Capitol Health ((CAJ)), CSL ((CSL)), Healius ((HLS)), Integral Diagnostics ((IDX)), Monash IVF ((MVH)), Nanosonics ((NAN)), Polynovo ((PNV)), Sonic Healthcare ((SHL)), Telix Pharmaceuticals ((TLX)), and others in the sector, were unable to awaken the fire in investors' belly.

In contrast with Ramsay and ResMed, analysts are left with a whole lotta less unanswered questions about the outlook for healthcare stalwarts such as CSL, Cochlear, Sonic Healthcare, Monash IVF and some of the smaller representatives, as covid-related headwinds are considered not permanent, and wearing off.

This in itself should prepare the sector for making a "healthy" come-back over the coming 12-24 months, all else remaining equal.

August Revealed The Strong

August revealed the Australian consumer is still remarkably resilient, though a variety of indications were equally provided that suggest the coming months might extend and deepen the true impact from steep RBA tightening.

Nevertheless, investors as well as analysts seem in agreement things might not get as bad as feared, not even when more negative impact is still in the future.

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