Australian businesses generally have proven to be surprisingly resilient during the COVID-19 pandemic, and many are entering the economic recovery phase in a good position, including many in AFIC’s investment portfolio.
These insights were confirmed at the recent 2021 Macquarie Australia Conference, the largest annual gathering of companies and institutional investors in Australia, where updates provided by 97 companies were mostly positive.
AFIC Portfolio Managers David Grace and Kieran Kennedy both attended the conference and agreed a common theme was that the current trading environment for companies is a lot more encouraging than had been expected.
“There’s no question that we’re seeing some recovery in the Australian economy, and many listed companies in our market really stand to benefit from that. We think the fears the market had around earnings pressures as COVID-related economic stimulus rolls off have been overplayed,” said David.
Companies are turning their minds to seeking growth, either through greater investment in existing operations or through M&A activity. Growth initiatives are being supported by cheap and ready access to capital. Companies are also looking closely at inflationary pressures on key inputs such as raw materials and wages.
The rebound in business confidence appears to be quite broad and across different sectors of the economy. Revenues have returned at a faster-than-anticipated pace for many businesses, and those that contained costs during the worst of the pandemic are reaping the benefits.
“I think businesses have been surprised at the resilience and the confidence that has come back into the economy and what that’s done for their revenue,” said Kieran.
“Given the uncertainty that prevailed last year, companies have kept costs fairly lean even though revenue is coming through, and we’ve seen some quite substantial profit upgrades as a result.”
As a long-term investor, AFIC would prefer that businesses reinvest any gains to drive future growth rather than seek to optimise their margins in the short term.
“We want to see companies take that windfall and put it back into the business so they can have a stronger revenue line coming out of this period when some uncertainty probably comes back into the environment over the next few years,” said Kieran.
What does it all mean for the AFIC portfolio?
Strong company presentations at the recent conference included four companies within the AFIC portfolio: Goodman Group, ResMed, Wesfarmers and ASX. The share prices of these companies have eased, which provides a good opportunity for AFIC to extend its position.
Other emerging companies that presented at the conference and look promising ‒ AFIC currently holds a small position in these companies ‒ include Fineos and Temple & Webster.
Fineos is a software company that services global health insurers and life insurers. Although there has been a lull for Fineos during the COVID pandemic, the company’s pipeline is building towards placing Fineos in a leadership position within its sector.
Temple & Webster, an online furniture and homewares retailer, has been a clear beneficiary of the COVID-19 pandemic as people’s movement was limited and they spent more money on their home environment. It is a good example of a company reinvesting greater profits with a view to creating long-term growth.
“That’s what we really look for from those emerging companies that are coming into the portfolio,” said Kieran.
AFIC’s strong position confirmed
Overall, the Macquarie conference reinforced our belief that the AFIC investment portfolio is well positioned as the Australian economy emerges from the impact of COVID-19.
“Our focus on quality businesses with long-term sustainability and growth has led to us having a bias towards companies that have a degree of pricing power, which means room for growth,” said David.
“In a market that has had a good run post-COVID, our focus is on finding companies that are able to deliver earnings growth in this environment opposed to those that will have to absorb rising costs. And even in an inflationary environment, we believe companies in our portfolio are best placed to be able to pass on any rising costs.
“The AFIC portfolio is in a strong position, and we’ve been attracted to the opportunity to add to some of the companies that have had a recent pullback in share price. Overall, we feel comfortable about our portfolio and the opportunities that lie ahead.”