The Point

Pendal’s Crispin Murray reviews the lessons from 2023 and outlook for 2024

Most people would be aware from last week’s per-capita recession headlines that Australia’s population growth is outstripping economic growth.

But population growth – especially immigration and temporary visas – is also supporting corporate earnings, says Pendal’s head of equities Crispin Murray.

“All up, we’re probably looking at about a 3 per cent rise in the population today versus a year ago.

“People are coming to Australia with money in their pockets, setting themselves up and getting accommodation – which is driving up rents.

“Part of the reason we’re seeing resilience in the top line of companies is because they’re basically driven by nominal GDP, not per capita GDP.”

Population growth is also offsetting the effects of the ‘mortgage cliff’ which forces households into higher, variable mortgage payments as low-rate fixed loans expire, Crispin says.

“With each company we met over reporting season, we talked about the issues facing them and if they were seeing consequences from this mortgage cliff. So far, the consequences are very limited.”

Aussie equities: Why it’s smart to take the long-term view on M&A deals

Newspaper headlines have been full of merger and acquisition activity and associated capital raisings in recent months.

Chemist Warehouse-Sigma Healthcare. Brookfield-Origin. Newcrest-Newmont. Allkem-Livent. Woodside-Santos.

The activity is likely to continue in 2024, especially in the resources space.

Investors haven’t always been impressed with recent deals – but that doesn’t mean there isn’t opportunity, says Anthony Moran, an analyst with Pendal’s Aussie equities team.

“Markets tend to overreact, especially around M&A. That’s exacerbated at the moment with fears that the economic cycle is rolling over.

“Investors are concerned that companies are buying businesses that may have puffed up earnings or been trading on a cyclical peak.

“But if you can do the work on the acquired businesses and start to get an understanding and more informed perspective on the probability of the success of a deal, then a sell-off can be quite an attractive investment opportunity.”

Aussie equities: AI and cloud computing drive data centre stocks

Elsewhere in this newsletter, Pendal PM Brenton Saunders nominates data centre stocks as one of three thematic opportunities in the mid-caps space.

Pendal analyst Elise McKay agrees, having just returned from a US trip where she met with participants across the data supply chain.

Elise believes established data centre (DC) owners with existing capacity are best-placed to benefit from growing demand due to the time it takes to acquire land, undertake construction and manage power requirements and other complexities.

“I’m very bullish on the outlook for data centres,” Elise says.

The accelerating shift to the cloud is driving demand. Global demand is forecast to triple in the next five years, according to research from Cushman & Wakefield. Generative AI is adding to that shift.

“There’s strengthening demand for DCs and supply is tightening,” Elise explains.

In some major DC locations, such as Northern Virgina in the US, vacancy rates are at one per cent. In Australia it’s closer to 17 per cent.

Aussie equities: Why you should be scrutinising capital-intensive stocks

Equities investors have rightly kept a close eye on rising operating costs during the recent period of high inflation.

Now it’s time to pay greater attention to capital expenditure inflation, says Anthony Moran, an analyst with Pendal’s Aussie equities team.

“Any company with a fair bit of capital intensity will be exposed to price rises in coming periods,” argues Anthony.

“If you’re a capital-intensive company, capex inflation is going to erode returns, especially if you don’t have pricing power,” he explains.

“If you’re in an industry where there are just a few manufacturers and they all have the same cost base, maybe they can pass through the higher costs.

“But if it’s an industry like steel, which is a globally traded commodity, there is no pricing power.”