Equities to come out of earnings ‘valley’: Munro Partners

Munro Partners has released its growth report for the first quarter of the 2023 calendar year, revealing the Munro Global Growth fund delivered a return of 2.1 per cent over the three months to 31 March. 

Its Global Growth ETF (MAET) also rose 2 per cent over the same period.

The result was underpinned by an early-year bounce across equity markets, which later moderated off the back of volatility in the US and European banking systems, stoking fears of a “hard landing” from the battle against elevated inflation. 

According to Munro Partners, the group’s equities investment strategy had been guided by assessments of long-term interest rates, subsequent downgrades in earnings forecasts, and the length of the current macroeconomic cycle.

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“Coming into 2023, we felt confident that two of these three factors had been met, with long-term interest rates peaking last October and the bear market passing one year in duration in January,” the fund noted.

“As the quarter has progressed, our confidence has increased.”

The group said headwinds undermining equity growth had subsided with the battle against inflation coming to an end, accelerated by banking volatility.  

“While market participants still hang on every inflation print and Fed meeting, it’s important to note that the recent banking woes in the US are basically doing the Fed’s job for them, and the resulting tightening in lending standards means the inflation battle should soon be over,” Munro observed. 

However, uncertainty about the extent of the looming economic downturn would continue to weigh on future investment decisions. 

“With this tightening cycle nearing its end, we essentially have one more macro concern to worry about before normal service resumes, and that is the age-old question: are we going to have a ‘hard’ or ‘soft’ economic landing as inflation comes down?” the fund manager noted. 

Munro Partners pointed to two potential outcomes — a gradual recovery supported by the reopening of the Chinese economy, the faster-than-expected energy transition, and the “reshoring dynamic,” or a traditional broad-based recession. 

But the group said it was “indifferent” to the outcome, claiming the equities market would hold value.  

“With long-term rates peaking, many of our holdings have returned to doing what they should be doing — following their long-term earnings prospects. 

“The pressure from rising long-term interest rates has been relieved, and hence valuation multiples have stabilised.

“We now see many instances where market participants can look through the valley and see earnings prospects improving and reward stocks accordingly.” 

In Australia, the S&P/ASX 200 was flat over the course of 2022, but the S&P/ASX Small Ordinaries Index plunged 18 per cent. However, since the turn of the year, the former had grown 5.4 per cent, while the latter had recovered 7.4 per cent of its value. 

Looking ahead, Munro Partners said areas of interest include the advanced technology space, supported by an expected increase in demand for high-performance semiconductors, and spending on luxury goods, supported by the reopening of the Chinese economy. 

“While there is no doubt there are a few bumps to come, we eventually expect earnings estimates for the whole market to bottom at some point and expect other [areas of interest] to exhibit similar earnings acceleration and stock performance as market participants eventually look through the valley to the other side of this difficult period,” Munro Partners concluded.