Legg Mason’s affiliate Martin Currie has said that the earning per share (EPS) revisions by brokers post-results had the worst ratio of downgrades to upgrades in over 10 years, despite the ‘green shoots’ in consumer spending and company results being broadly in line with expectations.
According to Martin Currie Australia’s chief investment officer, Reece Birtles, the ‘green shoots’ post election lending relaxation by the Australian Prudential Regulation Authority (APRA) and tax cuts helped lift consumer sentiment and spending.
“While it was understandable that the market had expected to see weak results due to the ongoing global uncertainty since last reporting season, we believe that the market was expecting a much more optimistic outlook going forward,” he said.
“Instead, managements across the boards talked about ‘air pockets’ in their outlook such, as low infrastructure spending and advertising, and the forecasts for the period ahead were very conservative.”
Further to that, Birtles stressed that the poor revisions by brokers and conservatives outlook from company management masked some of the positive signs and fundamental themes, which included:
- Consumer spending is better than expected
- The housing market was stabilising
- The funding environment was improving, but credit availability issues remained
At the same time, Birtles warned that B2B demand was still weak due to lack of government stimulus for businesses, business growth was lagging from low housing starts and delays in infrastructure projects and despite miners were getting a boost from iron supply disruption they saw current dividend payout ratios as unsustainable.
In terms of the outlook for Australian equities, Birtles noted that while economic and financial indicators suggested a growing probability of a global recession and he expected domestically focussed Australian companies to perform relatively better than companies dependent on global growth or impacted by geopolitical/macro issues, with the structural growth drivers such as population and employment growth important characteristics.
“We view that almost every single asset class and factor globally is fully priced, except for value. In Australia, valuation levels for the equity market may also be on the fair to high side in aggregate, but this hides a large divergence between premiums for defensive/quality/growth assets vs cyclical/value assets.
“We see heightened valuation dispersion opportunities within the Australian market and are positioning our portfolios towards more value opportunities, believing any policy response or stabilisation of data will lead to a reversal of high value spreads.
“While it is difficult to pick exact turning points, in September 2019 we have already begun to see signs of a value factor rebound in Australia,” Birtles said.