T.Rowe Price: This ASX stock is poised to benefit from Australia’s ‘cyclical rebound’
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Aussie are buying new cars again, and T.Rowe Price reckons Eagers Automotive (ASX:APE) is in for a big year.
And as Australia’s economy emerges from the pandemic, the investment fund’s head of Australian equities, Randal Jenneke, isn’t too phased by high stock valuations.
In a presentation this week Jenneke, said equities are “still the most attractive asset class around the world right now”.
He added that capital flows are being underpinned by low interest rates, leaving the stock market as “the best place to get a return right now”.
Data from the ABS yesterday showed that domestic inflation rose to 0.9 per cent in the December quarter.
However, Jenneke said T.Rowe Price takes the view that inflation growth through 2021 will be “on the muted side”.
In addition, the federal government wants to get employment back to pre-pandemic levels while the RBA has committed to bond-buying and yield curve control (YCC) measures.
Together, that amounts to an “important signal” for policymakers that “in order to get back to previous levels of unemployment, rates have to stay low”, Jenneke said.
So how should investors be positioning for this environment?
While noting the ASX benefitted from a marked shift into traditional ‘Value’ stocks (e.g. banks) in the wake of the US election, Jenneke doesn’t think the broader Value rally will have legs.
Instead, he’s focused on specific sectors that are leveraged to cyclical growth trends as the economy rebounds out of the pandemic.
Among those cyclical recovery pays, Jenneke singled out Eagers Automotive — Australia’s largest car dealer — as a potential breakout candidate.
He based his view partly on a promising trend in new car sales, which rose at double-digit monthly rates in November and December.
In addition, the November increase marked the first monthly rise since early 2018.
“Growth is coming back to this part of the market, and it’s coming at a time when the dealership model is under pressure. There will be structural changes to how new cars are sold,” Jenneke said.
“The old dealership model of having a car yard ion every main street and pumping volume doesn’t work. Car companies have to work with dealers to make whole chain more profitable.”
In addition, the pandemic has put severe pressures on global car supply chains, which has led to more limited supply.
This is “fantastic for a dealership model, because it means less discounting and higher margins”, Jenneke said.
And lastly, APE hasn’t fully realised its potential as a lender. “Their level of car financing is very low and they have the ability to increase that going forward”, he said.
Looking ahead more broadly to 2021, Jenneke said stock valuations look high by based on earnings metrics.
But those high multiples need to be viewed within the forward-looking prism that the market always adopts.
“What the market’s trying to do is preempt a cyclical earnings improvement through 2021/22”, Jenneke said.
“We know we’re going to get a strong recovery in both growth and earnings. So our prediction is that current multiples are justified, but it comes down to delivery of those earnings.”