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THE macro-economy – inflation, growth, employment – drives top-line sentiment among investors.
But earnings in sectors and companies drive the valuation of specific stocks, notes Pendal’s head of global equities Ashley Pittard.
This was demonstrated recently by a better-than-expected result for Facebook-owner Meta which pushed its share price up 25 per cent.
As the graph below shows, it then fell back sharply, albeit briefly, when stronger-than-expected labour force figures in the US hinted at further interest rate rises, taking the steam out of Wall Street.
Still, earnings season allows investors to look beyond the big picture.
“We’re about halfway through US earnings season and we’ve seen earnings growth fall by about 3 per cent, which is marginally better than what was forecast,” says Pittard, who manages Pendal Concentrated Global Share Fund.
While the energy sector has been the out-performer, thanks to very high prices, consumer discretionary stocks have been the surprise packet so far this season.
“The worst-case scenarios for the US consumer have been averted and they’re looking okay. It reinforces the view that if there is a recession, it should be mild.”
The laggards, as expected, have been the technology stocks.
“Across the economy, you are now seeing a normalisation of spending on technology and a slowing of cloud build outs,” Pittard says.
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“As a result, you are seeing cost savings announcements and capital expenditure cuts in the big tech companies.”
Across the earnings season there have been plenty of signs of easing inflationary and supply chain pressures.
At Amazon, for example, shipping costs as a percentage of gross merchandise value is back to 2019 levels and is trending lower.
Pittard notes one exception is Apple, where the company has been hit hard by production lockdowns in China.
Pittard believes it’s time to “take a little bit of money off the table” when it comes to energy stocks.
“I’m only talking about a couple of percentage points, and I’d use that to invest in the 2022 losers — that’s companies like Netflix, Warner Bros, Meta, Alphabet and Amazon,” he says.
biannual ASX outlook
Pittard uses Meta, which owns Facebook, Instagram and WhatsApp, to illustrate his point.
“After Meta’s earnings result its share price jumped 25 per cent. That’s because it was beaten down so much in 2022 – it fell nearly 65 per last year.
“When Meta said advertising revenue wasn’t as bad as people had thought, and they’re taking cost cutting measures and reducing capital expenditure, the share price surged.
“In summary, you want to be fully invested,” Pittard says.
“Earnings are coming through better-than-expected. There’s a lot of hurt in the market already from what happened last year.”
But investors need to be selective.
“You want to keep your financials because the recession will be mild. You want to keep your industrials because of the re-shoring that’s going on.
And you can be selective in technology and consumer discretionary.
“Investors should use the strength of their energy investments to rotate into some of those assets. “
Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.
Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.
Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.
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Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
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