Chanticleer, The Australian Financial Review
A few nights ago, Geoff Wilson, the founder of Wilson Asset Management (and new convert to X), hosted dinner with a group of fund managers who donate their services to the philanthropically focused Future Generation.
One topic dominated conversation: why hasn’t growing concerns dented the stunning rally that’s been running since November 2023?
After all, that rally – about 16 per cent for the ASX 200 and almost 27 per cent for Wall Street’s S&P 500 – was built largely on the expectation that the US Federal Reserve and the Reserve Bank of Australia would deliver multiple rate cuts as soon as the middle of this calendar year.
But where the market had expected six cuts from the Fed, there is a growing view that only one or two cuts may eventuate – or possibly none at all.
Speaking in Melbourne on a panel at a Future Generation event, Wilson revealed there was no consensus among the fundies as to why markets have brushed off this shift in rate expectations. The most logical reason is that stronger-than-expected economic data has sparked hopes of solid corporate earnings growth. “It seems, on the whole, economies are holding up a lot better than we thought,” he says.
On Wednesday night, those rate cut expectations will be back in sharp focus when the US inflation data is released ahead of the Wall Street open.
The market expects core CPI (excluding food and energy) will remain about 3.7 per cent in March on an annualised basis, only marginally lower than the 3.8 per cent reading in February. A number like that may well provide equity markets with a moment of pause if rate cut bets need to be reassessed again.
But Qiao Ma, portfolio manager at Munro Partners, won’t be joining in the inevitable obsessing over the timing of rate cuts that Wednesday night’s CPI print will spark. Speaking on the same panel as Wilson and Sandon Capital managing director Gabriel Radzyminski, Ma was blunt: “As long as we don’t have a rate rise, it doesn’t matter how many cuts there are.”
To be clear, Ma, who runs Munro’s new small- and mid-cap global growth fund, does expect the Fed to cut rates later in the year, as falling inflation is pushing real interest rates higher.
But as she hunts the next generation of tech stars – the fund’s top holdings include US semiconductor company Onto Innovations, American data centre cooling provider Comfort Systems, and Dutch chipmaker ASM – she argues that these do not need cheaper debt to drive growth. Instead, they need equity multiples to not contract (as happens when rates go up), and the artificial intelligence boom to roll on.
“We’re not relying on the Fed cutting rates to make money,” she says. “We are relying on the earnings of our companies and portfolio to make money. The market is doing what it usually does at this point of the cycle and looking forward to the economic recovery.”
While there are widespread concerns that valuations are already stretched in most developed equity markets, Ma says Munro has found plenty of examples of stocks that have yet to recover from being heavily sold off in 2022, despite the fact their earnings have surged.
One such “fallen angel” is website maker Wix.com, which has seen its earnings leap 10-fold compared with before COVID, but its shares remain 60 per cent below their 2021 peak. Munro believes earnings can grow another 20 per cent in the next two or three years as Wix deploys AI to help entrepreneurs set up not just websites but entire businesses, and grow sales of its coding services to professional website developers.
Radzyminski is betting on another straggler in ASX-listed modular building manufacturer Fleetwood Australia, which has fallen more than 22 per cent since early March amid delays to contracts for its Searipple accommodation village in Karratha in Western Australia. But he remains confident demand for that project and modular buildings in general will remain strong because of the infrastructure boom and housing crisis.
Wilson’s fallen angel is infant formula maker A2 Milk which, despite a recent impressive rally, remains more than 70 per cent below its 2020 peak. The WAM team believes it can deliver 30 per cent to 40 per cent of upside thanks to improving earnings; Wilson says a jump in marriages in the Chinese Year of the Dragon should lead to a spike in births.
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