August is shaping up to be an “eventful” reporting season as high valuations clash with low expected earnings growth, according to MLC.
With the ASX reporting season kicking off this week, Anthony Golowenko, portfolio manager at MLC, has warned that companies may be under increased scrutiny this reporting season.
Recent weeks have shown that the investment environment does not look fondly on companies providing a downgraded earnings guidance. In turn, the bar has been set “sky high” for August results.
“In short, appease (or at these valuation levels more like delight) the market, or else!” he said.
At the same time, he said the Australian economic landscape is now at or approaching “stall speed”, pointing to the unrelenting combination of challenges that have plagued consumers for a long time: cost-of-living pressures, mortgage repayments, and other household balance sheet constraints.
While he admitted that the recent Reserve Bank of Australia (RBA) cuts have offered some relief, he said the main worry remains the private sector workforce’s apparent recalibration to an environment of slower growth, with little apparent stimulus for more job creation.
Meanwhile, the period of significant growth in public sector employment – particularly in the care, administration, and infrastructure sectors – is now moderating to more sustainable levels.
“This conundrum has to be front of mind for the RBA’s Monetary Policy Board”, he said.
Taking a step back, he said that global equity markets are actually starting FY2025–26 “on a firmer footing”.
He highlighted a broad theme emerging from a combination of factors – a departure from recent years’ heavy reliance on the Magnificent Seven tech stocks and AI technology enablement.
Facing President Donald Trump’s tariffs and general volatility at the hands of the US administration, official interest rate cuts have been seen in various developed market economies.
As well as this, Europe has responded with more accommodative monetary and fiscal policy settings – perhaps most notably with Germany’s €500 billion infrastructure fund and a major defence spending boost.
Overall, Golowenko said he saw potential for several sectors to capitalise on the current investment landscape.
One of which was specialty real estate, owing to persistent housing affordability challenges, which provide a favourable backdrop for self-storage and land lease communities.
“The efficient movement of goods within an integrated economy, including last-mile urban infill locations, expanding into modern logistics and data centres, are all bright spots we see within the domestic REIT universe,” he said.
Following a “post-COVID normalisation period”, MLC also foresaw the healthcare sector as an area of interest in the upcoming reporting period. Specifically, quality healthcare businesses that offer higher margins and focus on enhancing quality of life, extending life, and promoting “living well”.
Golowenko noted that this trend aligns with the varied cost-of-living impacts on households as a growing number of Australian downsizers, free from mortgage burdens, are now prioritising an active, high-quality lifestyle.
Finally, MLC anticipated that large, financially stable, and well-established mining companies could be a “natural beneficiary” in diversified portfolios, potentially thriving when other “index heavyweights” or widely held names deliver disappointing reporting season results.
