The Macquarie Australia Conference provided an opportunity to connect with some of the companies that AFIC owns within the portfolio, and hear insights from other companies. Portfolio Managers David Grace and Kieran Kennedy share their highlights from the conference, the companies they heard from, and how economic uncertainty is shaping the market outlook.
The Macquarie Australia Conference is the largest annual gathering of companies and institutional investors in Australia.
While the general sentiment at the conference from companies and investors alike was one of caution as a result of increasing interest rates, we were reassured by the presentations and discussions from the companies in our portfolio that we believe are well-placed to navigate the ongoing market uncertainty.
Interest rates are certainly at the forefront of everyone’s minds, and that sense of uncertainty permeated through our discussions with companies. The RBA announced an increase in interest rates whilst the conference was underway, and that news served to reinforce the sentiment that the cycle of rate hikes is not over.
Companies are focusing on the long-term
Pleasingly, the focus from most companies was on long-term strategic ambition, rather than short-term trading conditions.
We were pleased with the updates from two companies that are most at risk of reduced consumer discretionary spending; JB Hi-Fi and Wesfarmers. While short-term trading conditions are challenging, both companies hold market leadership positions and operate business models at lower cost than all competitors. Additionally, both companies have very strong balance sheets, well-positioned to weather the current uncertain operating environment.
JB Hi-Fi provided a sales update that was more resilient than predicted which we believe reflects how their sector of consumer tech isn’t as discretionary as some other consumer sectors, particularly with the increasing reliance on technology as people continue to work from home. The company is also doing well in continuing to win market share from competitors.
Wesfarmers also provided a strong sales update emphasising that while they aren’t immune to the softening consumer environment, the various parts of their business are diversified well to navigate this challenge. Kmart and Bunnings in particular are proving resilient, with the latter having additional growth options through the introduction of new product ranges allowing them to diversify the business further.
Being the largest players in the majority of their end markets means Wesfarmers have a degree of pricing power which enables them to take market share in tougher times. In these tough times, the quality of the businesses we own shines through.
Volatility impacting some companies
We were slightly disappointed in the updates from two companies – Computershare and Cleanaway.
For Computershare, the margin balances they generate income off were subdued and the market needed to understand whether it was the start of a trend or if it was just the usual volatility in the space.
From our discussions with the company, we’re comfortable that it was more of the latter rather than anything structural with the business.
Cleanaway had considerable earnings pressure in their last financial results due to a one-off operational issue in the business. They require a very large workforce which has been difficult to sustain in a constricted labour market. Initiatives they have put in place to attract new workers are starting to bear fruit, and the pressures on the labour market are easing somewhat with immigration opening back up. Again, we are comfortable with our level of investment in the company.
Short-term caution presents opportunities for long-term investment
For a long-term investor like AFIC, the subdued and cautious short-term focus in the current environment presents opportunities.
We expect this environment to continue and consumer sentiment to fall further as pressure increases from rate rises.
The broader equity market has a strong focus on short-term returns and if we start to see the market selling in response to that short-term concern, we’ll be looking for opportunities where long-term growth remains sound.