Ausbil backs local market and has stock picks to prove it
The fund manager is more bullish than most on resources and financials.
Veteran fund manager Paul Xiradis took the stage at Ausbil’s adviser roadshow on Wednesday with a simple message: good times lie ahead for Australian equities.
Peering through the gloom of inflation, war and Covid, the chief investment officer and founder at $16 billion Ausbil Investment Management thinks the local market is poised to outpace expectations. Against the backdrop of a booming economy shaking off the pandemic, he’s betting on a second commodity supercycle, this time green, and higher rates returning blood to the financial sector’s cheeks.
A stable of Ausbil fund managers were on hand to provide the eager audience of advisers with the stock picks to match.
Xiradis says forecasters are being too conservative about earnings growth on the ASX this year and next. Consensus sees profit growth, the engine of equity markets, hitting 15% this fiscal year before dropping to single digits the year after and turning negative in fiscal 2024.
“Earnings are actually going to be better over the next two periods,” he says. “As we called out last year, the market was undercooking earnings. We do believe that will be the case again in 2022 and 2023.”
Ausbil is forecasting earnings growth of around 25% in this financial year and 12% in the next, a result that would be the second-best performance since 1993.
Investors are underestimating the next commodity supercycle too, says Xiradis. Demand is booming for metals like copper, lithium and nickel but mines can’t raise output fast enough after years of underinvestment and political problems in major producers.
Offshore wind is six times more metal intensive than coal power; solar three times, according to figures cited from the International Energy Agency.
Asked by Morningstar whether slowing growth in China and the possible end to debt-fuelled infrastructures binge could hamper commodity demand , Xiradis demurred. China is set to be a major producer of renewable technologies like electric cars, he says. The government is also unlikely to shift from its investment-led approach anytime soon.
To be sure others disagree. Morningstar director of equity research Mathew Hodge expects Chinese infrastructure investment to slow long term as urbanisation wanes and infrastructure needs are met, ultimately weighing on commodity prices.
Presenters graced the Sydney event two days after the Reserve Bank capitulated to inflation and raised rates for the first time since 2010. The US Federal Reserve and the Bank of England also hiked this week as the global tightening cycle gets underway.
Arguing markets are yet to fully price in the benefit of expanding margins at banks and insurers, Xiradis forecasts earnings per share growth for the fund’s stable of financial sector picks at between 3% and 30% above market consensus.
Ausbil’s stable of funds are enjoying a run of outperformance in part thanks to their overweight positions in resources and financials.
The bronze-rated flagship Ausbil Australian Active Equity fund leads the S&P/ASX 300 Accumulation index over a one-, three-, five- and ten-year horizon.
Some of its 14 funds will launch as actively exchange-traded funds later this year, although Ausbil declined to go into details.
Chief economist Jim Chronis used his presentation to sketch out how Australia should benefit from waves of investment around the world. More defence spending, moves to rebuild offshored factories at home and the accelerating energy transition should put a “floor under growth” and stoke demand in Australia’s commodity-intensive economy.
“Australia, given its natural imbalance is a net exporter of commodities and will outperform other economies and more importantly, the backdrop that I've just given you strongly favours Australian equities over global peers,” he said.
CSL, ResMed and Qantas
Head of equities research Nicholas Condoleon outlined the fund manager’s case for three local equity picks during his talk: biotechnology giant CSL, fellow healthcare name Resmed and Qantas.
With Covid-19 restrictions lifting, CSL’s plasma collection centres are reopening, says Condoleon. That should see the company return to the strong growth exhibited over the past decade.
The $10 billion-plus acquisition of Vifor Pharma announced in December should be transformative for a business with a proven track record integrating new buys, he said.
Narrow-moat CSL (ASX: CSL) closed on Friday at $268.16 and is trading in a range Morningstar considers fair valued.
Earnings at sleep apnea specialist Resmed have demonstrated resilient during downturns and the company is also expanding margins, says Condoleon. The shift to a “Gilette-like razor and blades” model provides annuity style returns, he adds, as consumers commit to a steady stream of product refills and replenishments.
Competitor Phillips is also battling a global product recall, which management believes will add between US$200 – US$250 million in sales this financial year.
Narrow-moat ResMed (ASX: RMD) closed on Friday at $28.80, a 18% discount to Morningstar’s fair value.
When Covid-19 grounded the Qantas fleet, chief executive Alan Joyce launched a plan to cut $1 billion in costs from the business by fiscal 2023. Condoleon says progress has been impressive while the collapse of rival Virgin should boost market share.
No-moat Qantas (ASX: QAN) closed on Friday at $5.50 and is trading in a range Morningstar considers to be fairly valued.