The Cut
Height Capital’s Weekly Update

We have just come off an interesting reporting week. Some of the major sectors have reported and major inflationary figures were released last week in US and China. Here is our cut of the announcements:

International insights

• China inflation was reported on Thursday last week. The figure illustrated slower growth than expected. While not negative, it was well under the inflation target expected. The first discussion always turns to stimulus from the government. We believe this will come but not right now considering where the current global inflation stands, and they don’t want to be increasing demand while underlying prices are high. Most Australian investors will be hoping that the stimulus will be driven spending on external consumption and increasing infrastructure and property. We don’t believe that will be the case, while some of the stimulus will focus on growth, we believe the stimulus will be focused on the internal consumption and support the community who have just exited some of the hardest lockdowns around the globe for 2022. In our view, if you are playing the reopening/stimulus package trade, focus on soft commodities, increased demand for services, not raw materials.

• US also reported a 5% increase in inflation last week. This illustrates a falling figure and will increase the discussion of a softening stance in the US on Federal Reserve’s rate discussion. This is still well and truly above the long-term target and will not stop the Fed from wanting to slow the economy. Reuters produced an interesting article throughout the week that discussed the inflation slowing may not cool fast enough to justify stock valuations at the current time. The positive sign for the Federal Reserve is that unemployment has increased to a 1 ½ year high which will help slow the rate increases. We are still a long way off the 2% inflation rate the US Federal Reserve requires.

Australian insights

• NAB’s first half earnings announcement last week is pretty consistent with the narrative for the moment that bank earnings appear to have peaked, and the risk is now skewed to the downside. NAB has been a popular holding amongst fund managers in recent times. With a higher share of business lending compared to peers, net interest margins (simply speaking, the difference between the interest rate the bank borrows and lends money out at) should be resilient in the face of the intense mortgage competition in the sector. Cash earnings increased 17% on pcp, dividend per share was $0.83, up 13.7% on pcp, and cash return on equity was 13.7%, up 2.4 percentage points on pcp. The share price was sold off on results day, falling 6.4% however. Sell-side analysts are of the view that margins have peaked, and with anaemic dividend growth forecast for the next few years, it’s difficult to see a strong share price performance until things change.

• Last week allowed us to see that the ‘safe trade’ in defensives isn’t always as it seems if valuations are stretched, and the trade is crowded. Amcor’s 3Q23 results last week were the perfect example. Amcor has long had the reputation of a high quality, defensive, inflation hedge but, the company downgraded full-year guidance range to US72¢ ($1.08) to US74¢ a share, from between US77¢ to US81¢, a 7.6% downgrade at the mid-point. Management warned that demand was likely to remain weak. Amcor is the world’s largest consumer packaging company and thought of by the market a proxy for economic growth.

• During the week, Height Capital Adviser team attended a webinar with investment bank Barrenjoey’s Chief Australian Equities Strategist. A key theme of the presentation were that buying defensives ‘at any price’ will lead to low future returns, and discussed the bond trade over equities was well and truly in play for most investors. The discussion was clear that Value across the board in equities were well and truly overprice and when comparing with Bonds showed signs of negative returns. They also talked us through their review of corporate earnings are still expected to come under pressure, with expectations of a decline of 10% in Australia and a fall 15% in US earnings. This echoes Height Capital’s own Investment Committee analysis made back in December 2022, which can be found on our website where we discussed the similar view in our article: Future Earning Outlook – Height Capital.

Please reach out if you have any questions or would like to discuss anything in this newsletter in more detail. If you enjoyed this update and know of someone that may be interested in also receiving our newsletters, please pass on their details.