Australian equities outlook

Summary

• A fall in long-bond rates at the end of 2023 led to a FOMO rally

• While investor sentiment changed, not a lot else from a fundamental perspective changed in our view

• We think local equity markets in 2024 will be defined by valuations justifying themselves

Full transcript

What characterised local equity markets in 2023? 

With interest rates hitting nearly 5% in late 2023, the stock market was under pressure. But with inflation data coming out that was more supportive, we saw a fall in the long-bond rates and we saw the equity markets have a strong rally in late 2023. And that was largely some of the large-cap names. Some of the resource names were strong and also some of the largest small-cap names. 

I think FOMO is a good word because a lot of investors jumped on board in terms of fearing they're going to miss out on the rally.

What will drive local equity markets in 2024? 

Look, the micro-cap component of our portfolios didn't participate in this rally, but it doesn't mean we won't participate. It just may be a little bit delayed. What we've had is the sentiment has changed, which is great for risk assets because people look at equities, look at property, you know, with fresh eyes. 

But from a fundamental point of view, have company earnings changed in 2024? Well, not really. Not, not much. What has changed is in investor's appetite, and they're looking at these assets. We think 2024 is going to be about a period of assets justifying themselves on their fundamentals. They've got to stack up on forward-looking price earnings multiples. Their valuations have to be supportive. So we think remaining disciplined in valuations and being selective in terms of what we buy and what we sell will be rewarded. 

What’s happened in sentiment-led rallies in the past? 

We saw a pretty aggressive rally coming out of the GFC and generally, the rally was in companies that were significantly beat up. This wasn't the case of the 2023 rally. The market has been relatively well supported over the years. We saw a decent move in late 2023. But it was not as if (valuations) we were coming from very depressed levels.  

So sentiment has changed. The stock market was pushed up, but coming into 2024, interest rates are circa what they were throughout much of 2023. 

Which companies are well-placed to perform this year?  

A good example in the Australian Shares Fund and the Emerging Companies Fund is a company called Capital Health. Capital Health lost over 20% in 2023. The company provides radiology services (and) is very Victorian-focused. Nothing fundamentally changed in that business. The stock market downrated it. But, you know, we've held the positions and we've added a little bit. We think it should do pretty well in this type of tough environment. 

Another company that we've recently brought into is Webjet and Webjet's other business is a company called WebBeds. WebBeds is a B2B business and it provides hotel beds to the travel industry. We think it's a great business. It's on a reasonable forward-looking multiple of around 20 times. And we think travel is a long-term thematic that’s not going away. And countries with higher GDP will spend more on travel.