Datt Capital’s three visible takeaways from earnings season plus three stocks well-positioned for economic headwinds
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The latest ASX earnings season points to a rocky road ahead for the Australian economy equities investment manager Datt Capital chief investment officer Emanuel Datt.
He said whether Australia experiences a recession or not, the message from the latest ASX earnings season is one of unevenness in opportunities and obstacles to performance going forward.
Datt said there were three clear takeaways from ASX earnings season.
“Labour shortages, inflation and an increasing cost of capital are three of the most visible take aways from the current crop of company postings,” he said.
Datt said capital intensive industries such as mining have an advantage in terms of being able to support higher salaries and accordingly appear to be attracting staff from other sectors, although at a higher cost than usual.
“Labour intensive industries such as logistics, construction and contracting, continue to struggle with high labour costs and lower than typical productivity,” he said.
“This is leading to high levels of financial distress amongst industry participants.”
Datt said service industries and SMEs with more flexible working conditions continue to muddle through.
“Though with international student numbers and immigration rising, it is providing relief to these sectors after a problematic three years.”
“Labour price inflation continues to be a huge issue across sectors.
“In many cases the escalation in labour prices has been in the double digits, especially in traditional blue-collar roles.”
Datt said productivity overhang is a symptom of higher employee turnover due to the time lag involved in shifting roles.
“Inflation in materials, particularly rises in raw material costs driven by increased labour and shipping costs along with lower productivity, was also a common reporting theme,” he said.
Datt said on the capital front, significantly increased interest rates, along with further projected rises, are likely to continue to adversely affect the cost of business funding.
“Limited ability to pass on costs due to shrinking discretionary spending power is a further squeeze from another direction for many businesses particularly in the consumer sector.”
Datt said for example in retail, both Temple and Webster (ASX:TPW) and Baby Bunting (ASX:BBN) had exposure to escalating costs without the ability to pass these onto customers and both missed guidance.
Datt said he expects insurance and non-discretionary retailers to do well in an environment of rising costs.
“These business sectors are able to pass on increases in costs to end customers more easily than other sectors, thereby dually benefiting from an increase in top line revenue and the preservation of profit margins,” he said.
Among his top picks in insurance and non-discretionary are:
Datt said QBE is a general insurer that is well diversified, by business line and geographically. As a general insurer, it will benefit from increases in premium rates as well as increases in interest rates given its investment portfolio’s asset allocation.
“Woolworths is primarily a food retailer and benefits from higher food prices as it is able to preserve margins by passing costs through to its customers,” he said.
“The large scale of its business means this can be performed in a targeted manner.”
NHF provides primarily private health insurance to customers in the ANZ region.
“Health insurance is a fairly ‘sticky’ product where premium increases can be passed on relatively easily,” Datt said
“It will also benefit from rising interest rates from increased yield on its investment portfolio.”
Datt said the market outlook he believes favours the Datt Capital approach to investing.
“We are industry and market cap agnostic and simply seeking the best opportunities utilising our proprietary research resources and an investment process based on creativity and independent thought,” he said.
“In our view the domestic investment scenario is less likely than ever to favour a passive approach in the near to medium term.”
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