The resilience of equity markets was tested in October, with the ASX 200 declining by 1.3%. The impact of higher bond yields and softer-than-expected AGM trading updates weighed on market sentiment. Notably, this has led to a decline in market earnings estimates for calendar 2024.
Initially, the negative revisions were confined to the resources sector, but they broadened in October to include the consumer staples and industrial sectors. The persistence of higher-for-longer interest rates and cost-of-living pressures is now having a dampening effect on corporate earnings. Yet, valuations remain elevated, with the ASX 200 trading on a 12-month Price to Earnings (P/E) Ratio of ~18 times, an almost +20% premium to the long-term average. The disconnect between the negative trajectory of earnings with near record high valuations is disconcerting and warrants a more cautious approach.
In October, we adjusted our portfolio by trimming positions in WiseTech Global Technology (WTC) and Goodman Group (GMG), using the proceeds to increase our exposure to Premier Investments (PMV) and Santos Limited (STO).
Our decision to trim WTC was initially driven by valuation considerations, given its significant rally over the past year, with a return of approximately 116% compared to the ASX 200’s 23%. Shortly after this trim, governance concerns regarding WTC’s founder emerged, which added to the stock’s volatility. While we didn’t anticipate these developments, our reduced position provided some insulation from the recent share price impact. WTC remains a high-quality business with substantial growth potential, but we are mindful of the risks that accompany founder-led structures, particularly when key person risk is involved, and that the stock is trading a PE ratio close to 100X, which we view as excessive.
In contrast, we increased our position in PMV after it saw a ~10% decline following its latest annual results, largely driven by weaker-than-expected revenue growth, a soft start to FY25, and concerns over strategic uncertainties surrounding the potential Myer merger with its apparel brands and de-prioritisation of the Smiggle and Peter Alexander demerger. Shortly after our addition, PMV announced the merger of its apparel brands with Myer, which was well-received by the market and led to a 10% increase the following day. We view PMV as maintaining a strong balance sheet and pursuing attractive long-term growth opportunities.
Meanwhile, increasing our position in STO reflects our view that the energy sector offers a compelling valuation opportunity, with sector P/E Ratio remaining far below its 52-week highs. Santos is well-positioned to benefit from its strong production profile and ongoing demand for LNG.
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