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From Covid to conflict, the issues set to drive markets

Look to the real economy in the pursuit of returns

From Covid to conflict, all it took was just a few weeks for the market to shift its attention to the unfolding crisis in Ukraine and away from the pandemic. The crisis disrupted supply chains and triggered record-high inflation which forced central bankers to raise rates to contain the rise. What came next, was a share market rout that saw investors flee risk assets, such as tech stocks and cryptocurrency, in favour of safety amongst cash, and gold.

Ausbil CIO, Paul Xiradis and Senior Portfolio Manager, Nicholas Condoleon, spoke at the Ausbil Investment Roadshow 2022 in Melbourne to discuss how Ausbil will generate active returns over the longer term.

Xiradis says, ‘Today we have a man-made issue to deal with, that is, a market that will see for the first time in years rising inflation and rising interest rates. There is also another major theme that is happening in the background… and that is decarbonisation.” Certainly, last year the market was underappreciating in terms of earnings growth. It was one of the best years we’ve had, in terms of earnings growth. Out to 2024, Ausbil expects upward revisions in earnings.

  • Ausbil believes underlying earnings growth will remain positive, and quite strong. The overall market multiple, in 2023 is trading at 15.6x, which is neither cheap nor expensive. Ausbil’s figures have the market at the end of 2023 at around 14x.

    So, what will be driving markets forward for the next 12 months and beyond?

    Xiradis says “1. Energy transition is underappreciated here in Australia, but it is growing and will be with us for many years to come. We need to decarbonise and soon. The crisis in Ukraine has brought the decarbonisation need forward. 2. Inflation – There’s no doubt inflation and interest rates are on the rise and that will affect companies in different ways. 3. Companies in sectors that won’t be subject to undue earnings pressure because of the underlying economy. 4. Transition – How large energy companies are going to transition to net zero and decarbonise.”

    Supply is the issue and that brings up inflation and interest rates. “Only 12 months ago were economists saying, interest rates won’t go up. Fast forward to today, and interest rates are about to take off” says Xiradis.

    What does it mean for certain sectors and stocks?

    Xiradis says the technology sector has come back quite dramatically. With rates going up, one sector that will do quite well is the banks and insurance companies. Computershare is another company that will also do quite well.

    “And many of these industries are doing well. The banks and insurance sectors are doing well, not by rates going up, but by other factors. Bank performance has been driven by low bad debts, solid earnings and they will be net beneficiaries of rising rates,” adds Xiradis. 

    Xiradis goes on to list six stocks that are poised to benefit from rising rates – Computershare (ASX:CPU)., QBE Group (ASX:QBE), Suncorp (ASX:SUN), Insurance Australia Group (ASX:IAG), Commonwealth Bank (ASX:CBA) and NAB.

    He says that the earnings sensitivity to a 1 percent increase in underlying rates will equate to a:

    • 46 percent rise in earnings for Computershare
    • 22 percent for QBE
    • 10 percent for Suncorp and
    • 8 percent for IAG

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