Defying the downturn: a dozen companies to watch
Indicators may be pointing to a global slowdown but companies that are well managed and export-focused could continue to be profitable and deliver good earnings growth.
Against the background of slowing global economies, which could hamper earnings for domestic-focused companies, some companies that are well managed and export-focused could continue to be profitable and deliver good earnings growth.
According to a selection of equity researchers and fund managers, they include:
- Global biotechnology manufacturer CSL (ASX: CSL)
- Global winemaking and distribution business Treasury Wine Estates (ASX: TWE)
- The so-called WAAAX stocks:
- Logistics software company WiseTech Global (ASX: WTC)
- Buy-now, pay-later fintech company Afterpay Touch Group (ASX: APT)
- Machine-learning and AI developer Appen (ASX: APX)
- Electronics design software company Altium (ASX: ALU)
- Cloud-based accounting software company Xero (ASX: XRO)
- Gambling machines maker Aristocrat Leisure: (ASX: ALL)
- Plumbing parts supplier Reliance Worldwide: (ASX: RWC)
- Petroleum exploration and production company Woodside Petroleum (ASX: WPL)
- Oil and gas producer Santos (ASX: STO)
- Natural gas and electricity operator APA Group (ASX: APA)
The risk of Australia falling into recession has grown, a development that has seen the 10-year bond yield fall to its lowest level since September 2016. Around the world, government bond yields are falling as fears of a global economic recession build.
Against this background, AMP Capital chief economist Shane Oliver says share markets are due for a correction or pullback after rallying strongly since their December lows.
“Worries about inverted yields curves and the growth outlook could provide the trigger,” Oliver says.
Morningstar's head of equities research, Peter Warnes, says very few sectors will be immune from the slowdown. With shares inevitably selling off if growth slows, investors shouldn't be hoping for much more than a total return of 5 per cent.
“Five per cent is where your sights should be,” he says.
Sectors that have benefited already from falling bond yields such as listed real estate investment trusts (REITs) and infrastructure businesses are now largely fully valued, and it is unlikely investors will enjoy the returns they have in seen in recent times.
Banks too are unlikely to achieve any decent earnings growth given the slowdown in the property market and near record levels of household debt.
Household debt towards the end of 2018 was equivalent to 127 per cent of GDP, or 189 per cent of disposable income.
Warnes points to the healthcare sector and energy stocks as being more immune to an economic downturn. He points to CSL as being the pick of the healthcare providers.
“CSL is doing very well. People still need blood and vaccines to live and it's a global market they are in. The company has diversified into vaccines and it is very R&D-driven. It is the best managed company in Australia by a country mile,” says Warnes.
He is less sanguine, however, about medical device-makers such as ResMed, which specialises in sleep-disorder-related equipment, and ear-implant manufacturer Cochlear.
“I am not as keen on devices as devices can become unstuck,” he says of ResMed and Cochlear.
Hamish Tadgell, portfolio manager at SG Hiscock & Company, says companies with offshore earnings will be better insulated from any domestic slowdown, with the potential to benefit from a falling Australian dollar if Australia’s growth slows and the Reserve Bank reacts by easing interest rates.
Tadgell singles out global biotechnology manufacturer CSL and global winemaking and distribution business Treasury Wine Estates.
“Companies that are global leaders and particularly well positioned to capitalise on structural growth tailwinds such as CSL and Treasury Wine Estates should continue to do well,” says Tadgell.
REITs and companies with defensive earnings characteristics should also be better positioned, he adds.
“This includes consumer staple, paper packaging, healthcare and REIT and infrastructure style companies. The challenge in this environment is [that] many of the defensive ‘bond proxy’ companies have rallied strongly in the last few months … and valuations are starting to look extended.”
Julian Beaumont, investment director at Bennelong Australian Equity Partners, says during an economic slowdown, structural growth stories outperform. Typical examples include the tech names, or “WAAAX”: WiseTech Global, Afterpay, Appen, Altium and Xero.
Beaumont also singles out CSL and other companies such as pokie machine maker Aristocrat Leisure and plumbing parts manufacturer Reliance Worldwide.
“Here, the thinking is they will growth regardless of the economic conditions, as their growth is through disruption, selling new products or services, or other structural factors. Other structural growth names might outperform, although there is little evidence recently of this recently despite a softening economic outlook.
“Most of these are high quality global businesses. In our view, companies like CSL, Aristocrat Leisure and Reliance Worldwide fall into this later camp, and as a plus, they all sport reasonably attractive valuations.”
Energy stocks such as Woodside Petroleum (ASX: WPL) and Santos (ASX: STO) could also deliver good returns to investors given the global movement towards clean energy, including liquefied natural gas.
As Australia's largest LNG producer, Woodside Petroleum is an obvious beneficiary of this movement. LNG has carbon emissions up to 25 per cent lower than diesel and 30 per cent lower than heavy fuel oil.
“Yes, energy stocks can be riskier, but they are no riskier than iron ore miners,” says Warnes.
“The tailwinds are still quite positive for energy as more and more energy being consumed will be LNG and that favours Woodside and Santos, and to a lesser extent Origin Energy, but it still faces risks in the retail energy market.”
Warnes also suggests APA Group, Australia's largest natural gas infrastructure business, should stand to benefit from the move towards LNG globally.
The Reserve Bank of Australia assistant governor Guy Debelle recently said that climate change “presents significant risks and opportunities” for the Australian economy. He singled out LNG producers and lithium exporters as potentially benefiting from the move to lower carbon emissions around the globe.
Warnes says companies in resources sector such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) could see their iron ore export volumes decline with a global economic slowdown.
“If global growth does become more subdued then it's hard to see where the growth in export volumes will come from and there is plenty of supply of iron ore out there.”