Manufacturing rebound in sight: WAM Leaders

David Rogers, Markets Editor at The Australian

An emerging rebound in the global manufacturing sector could be a tailwind for several Australian companies this year, according to Matthew Haupt.

As the February profits reporting season wraps up, the lead portfolio manager at listed investment company WAM Leaders expects Australian companies such as Ansell, Brambles, Orora, Qube Holdings and WiseTech Global to reap the benefits of a global restocking cycle as the impacts of Covid-era lockdowns and stimulus continue to normalise.

The AI boom may be grabbing the headlines, but Mr Haupt sees early signs of an upturn in manufacturing PMIs – purchasing managers indexes – after a long downturn as consumers switched back to services after the pandemic and as interest rates were lifted to clamp down on inflation.

Manufacturing PMIs for the eurozone and China remain in contraction, but the JPMorgan global manufacturing PMI hit a 17-month high of 50.1 last month.

Updated PMI data is due on Friday.

“During Covid lockdowns everyone was buying stuff, and then as lockdowns ended everyone was using services like travel,” Mr Haupt said. “Then you had this big destocking phase, an inventory glut.

“But now it looks like the manufacturing cycle has turned and is going on a little bit of a run.

“Companies are telling us the destocking phase is over, so maybe that global manufacturing recession is over.

“That has dramatic impacts for a lot of companies, particularly industrial companies.”

Mr Haupt has joined Future Generation Australia’s team of pro bono fund managers with a 3.8 per cent allocation of its funds. The Geoff Wilson-founded Future Generation is Australia’s first listed investment group offering both social and investment returns. It has so far donated more than $75m to not-for-profits that improve the lives of young people.

He said a clear theme from the February reporting season was cost management.

“It sounds quite obvious going into a slowing economic environment, but the companies that did well on cost, their share prices ­really went up with it and it’s really just a function of good management really addressing issues and taking proactive steps,” Mr Haupt said.
In that regard, the reporting season also highlighted the importance of CFOs’ roles within companies.

“Obviously at low interest rates or zero interest rates the focus of a good CFO was probably lost over that period,” he said. “But with rising interest rates or higher interest rates the role of the CFO has come back into focus and you could really see the difference there.

“I think the CFOs probably felt unloved for quite some period of time. We lived in this environment of low interest rates or zero interest rates for well over a decade before the Covid pandemic, so their role had largely taken a back seat. But the focus this reporting season was huge on that interest line, and how they’ve positioned themselves going forward.”

Orora in particular had done “an incredible job” on cost control, in his opinion.

“They’ve been operating in a market with double-digit volume declines, and still growing earnings for the last two years, which has been an incredible job,” Mr Haupt said. “Companies that have actually improved productivity have done well.

“As inflation goes up, the only way to counter that is productivity, so companies like Orora have absolutely surprised us in what they have been able to do.”

He said Treasury Wine Estates presented a long-term buying opportunity as the company had “gone through an incredibly tough period”.

“They’ve redirected all their volumes and if China does open up they get to push all volume back through China, they could lift prices, so for me it’s long-term – you can’t replicate this business,” he said.

He also said he couldn’t fault the major banks, but added that WAM Leaders was “massively underweight the banks now, purely on valuation.

“I think the risk in Australia was we were going into this big slowdown and there was going to be stress emerging through the households,” he said.

“Clearly that has not happened yet, which I still find staggering, but all the banks have very benign bad debts, and the arrears have ticked up slightly but there’s really no signs of stress in the Australian economy, so the banking sector probably did better than feared.”

But he said he suspected much of the recent strength in banks had been due to passive funds.

“When people get exposure in MSCI Asia, they probably look across and say ‘I can’t invest in China, Japan is sort of running away, so what’s big and liquid in Asia … Aussie banks come up,” he said.

Such overvaluations “can last for a long time”, he said, noting that MSCI continued to delete Chinese stocks from its MSCI Asia list, but “it just feels like it’s starting to break down”.

Looking ahead, he said an “absolute Goldilocks scenario” had been priced into the market.