The Cut
Height Capital’s Weekly Update

This is a new weekly email that Height Capital has put together to keep our clients and associates up to date with market conditions. We hope you find it of interest.

International insights

We start this update in the middle of US reporting season. Our key points of note this week include:

• Strong reporting period for large companies, with Apple, Microsoft and Google all demonstrating solid growth. The big discussion point was the future growth prospects of these businesses. Apple announced a new cash holding facility within Apple Wallet which supported the view of their ongoing growth potential. The first week of deposits saw $1Billon in deposits flow into the high interest rate cash account.
• Banks in the US have experienced significant volatility over the past few months in reaction to the liquidation of a small number of regional banks. The fundamentals of the large banks have never been strong, but the underlying economy is certainly seeing signs of stress. The large, high-quality companies have again floated to the top. JP Morgan bucked the trend and increased revenue and return on equity over the reporting period. They find themselves in a prime spot to benefit from the consolidation of regional banks as the Government looks to stabilize the market. Large US banks have all achieved growth in earnings the past quarter. However, markets are also pricing in slower growth and smaller margins moving forward.

• An article by John Kemp at Reuters caught my eye as it discussed the outlook of the US economy and whether it indicates a recession or not. The conclusion was that we are in for a long-term slowdown. This is a similar view to that held by our Investment Committee. The Committee anticipates global growth is slowing and markets have not fully priced this into estimates just yet. Kemp’s article states that Recession or not, the US economy is slowing and losing momentum. The key point of his article is, regardless of whether an official recession occurs, we are in for a long-term slowdown. The key indicators are paused between a significant mid cycle slowdown and a formal cycle ending recession. The deciding factor in this is overall economy continues to operate in its split state – manufacturing divided from the service sector. The manufacturing index illustrates a contraction compared to non-manufacturing indexes which signal continued positive growth. In Kemp’s view, the service sector is only a few months away from falling into a contraction position. Given this, we believe you should be watching for the following:
  • Fall in oil and gas prices as the economy slows.
  • Unemployment will start to lift, which will see the effect of rate rises and lead to a longer slow down than expected.
• German industrial output slumped in the first quarter as the high energy prices and slowing demand makes them vulnerable falling into recession. European markets are a ‘Watch this Space’ given the headwinds they have confronted throughout 2022.

Australian insights

In Australia, what caught our eye:

• Macquarie Group (MQG) have reported strong earnings. Macquarie has a war chest of capital looking for opportunities. Key drivers of performance have been the asset management and trading arms which have seen strong performance from the commodity division. Current figures don’t paint as positive a picture as we have come to expect from this business. However, it has increased earnings per share to $13.54 (a 6% increase). Dividends increased by 21% to a full year dividend per share of $7.50 (final dividend in May of $4.50 was declared). With a slower first half of the year, we have seen the Return on Equity fall to 16.9x, which is a decline of 10%. While ROE still represents a strong position compared to its competitors, it’s not as firm as we expected considering the market conditions of the sectors in which they operate.
• ANZ Group reported last week. The report was in line with expectations and illustrated the group has maintained quality business after the reset that has taken place over the past 5 years following its exit from the Wealth Management sector. The businesses’ earnings per share increased by 16% year on year. The was predominantly driven by increased mortgage rates. Dividend per share increased by 9% on last year’s dividend. They have also seen an increase in Return on Equity by 10% which has now hit 11.40% which is a good outcome for a business that had seen its ROE reduce over the past few years. The report illustrated strong growth in Australian based Commercial and Institutional banking sectors, which we see as a good sign of diversification of businesses revenue stream away from retail consumers.
• Analysts from Macquarie produced a research report on the Australian Banking Sector, which outlined they could face a 15% to 20% decline in earnings. This was due to an expected increase in defaults from underperforming mortgages resulting in additional pressures being placed on profit margins of all major banks. This was especially true for the core 3 – CBA, MQG and WBC, who have been undercutting the market with lower priced mortgages over the past few months. The analysts are seeing a short-term increase in earnings which we anticipate will be the focus of this reporting session. The flow on of increased cost of debt is still yet to lead to higher default rates. We are reviewing the portfolio as we speak and will act to remove any associated risk from the portfolios as we see fit.

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