The Cut
Height Capital’s Weekly Update

Last week Height Capital’s Investment Committee met which was an interesting discussion given the current holding pattern of global markets. It was a great time to reflect on market conditions. Here is our cut of the announcements:

• The main discussion of our Investment Committee was earning estimate, market outlook and expected adjustment to earning that we expect to come over the next 6 to 9 months. The discussion was that markets are not really factoring in any adjustment to earnings post the current rate rises and increase in costs. The view was that analysts have not adjusted the long-term earnings estimates for the slowing economy. The below graph illustrates they have pushed back earning guidance by a year after factoring in a reduction in first two quarters of 2023. We agreed with the reduction in the first two quarters of 2023, but we don’t see the big bounce in back in the 4^th quarter of 2023. We think is very unlikely and while an increase could be factored in, a 9.4% increase in our view is unrealistic. We use US data at the current time given the direction the US Market has on global investment landscape.

• Last week we highlighted China’s inflationary figures. The discussion in the past few months in our Investment Committee has been on emerging markets given the valuations and potential upside from reducing inflation. This coupled with China’s slow economic conditions makes you think about where the capital is moving to, especially with major analysts adjusting or slashing GDP Figures in China from an estimated growth rate of Quarter 2 from 5% to 1%, which leads to a slower annual growth rate. What this has led to is the majority of capital flowing to emerging markets debt but excluding China.

• Bond investors, meanwhile, have been voting with their feet. A decade of strong and steady inflows into Chinese debt securities reversed when Russia invaded Ukraine in February 2022, and foreigners show no sign of being tempted back. This illustrates that a China sugar hit may not be on the cards especially with this style of outflows.

• Australian first quarter 2023 wage growth data was released last Wednesday, which presented a slightly mixed narrative for markets. Year-on-year growth of 3.7% beat economists’ forecasts by 0.1%, a material surprise and negative for markets. However, the quarter-on-quarter growth printed at 0.8%, which was in line with estimates and the prior quarter. The release likely provides little comfort to the RBA, despite a lack of evidence that suggests wage price rises are continuing to accelerate. Decade high levels of 3.7% may be too high for what the RBA views to be consistent with their 2-3% long-term inflation target.

• Another economic surprise for markets last week was the Australian unemployment rate rising to 3.7% against expectations of 3.5%. Largely driven by job losses, this could indicate that tighter monetary policy is starting to influence the labour market. Equity markets rallied on the news. Bond markets are currently pricing a 0% probability of a rate increase to 4.1% at the next RBA meeting but still expect at least one more to come.

• Data centre developer and operator NEXTDC recently announced a fully under-written A$618m Entitlement Offer to fund their regional expansion. Proceeds will fund new data centre developments in Kuala Lumpur and Auckland and accelerate upgrades to an existing site following an increase in utilisation rates. The offer was well received by the market, with the share price performing resiliently when trading was reinstated (following a dilutive capital raise, share prices generally fall to the discounted offer price). NEXTDC has been a strong performer for the portfolio this year and we like the thematic behind infrastructure and increased data consumption.

• Accounting software platform Xero reported their full year results on Thursday, impressing investors with 28% revenue growth to $NZ1.4bn, driven predominantly by new subscribers. The financials took a $NZ126.5m non-cash impairment however, relating to prior acquisitions, but this was overshadowed by a low customer churn of 0.9% which highlighted the strength of their business model. Free cashflow growth of $NZ102.3m grew in line with revenue at 28% year on year.

Enjoy the rest of your week. Please reach out if you have any questions. If you have anyone that may be interested in receiving our newsletters, please pass on their details.