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September 2017

Investment insights

Small caps reporting season wash up

 
Reporting season is akin to a tsunami of information - as the tide recedes, fundamentals are laid bare in outlook statements and cash flows to reveal who has best weathered the storm. This year was a firm reminder that stock picking remains critical with correlations close to historic lows. 
 
The winners
Fundamentally solid companies such as Altium, Corporate Travel Management, Cochlear and Wisetech Global delivered solid results. Key to this success was the uniqueness of their offering, sustainable financial positions and management, and a focus on global positioning. During 2016 several of these companies faced difficult share price performance as investors sought out lower valuation style investments and cyclical exposures. A performance recovery is now occurring as these companies are able to demonstrate that the “quality” nature of their businesses has withstood the test of time.
 
The losers
There were a couple of discouraging results. Healthscope for example, delivered another year of disappointing post-IPO trading. Other companies that performed below expectations include: CSG Limited, Catapult, GBST, Mayne Pharma, Coca Cola Amatil, Select Harvests, Innate Immunotherapeutics and Sigma Healthcare which were down 15 to 95% over the last 6 months, but were either not held or underweight in the Fund.
 
Broader themes
Over the last few years particularly, risk has been mispriced. This reminds me of a recent conversation I had with a property CEO who observed that the yield differential between grades of property in prime, A, B or C grade had significantly condensed. Risk spreads have narrowed as asset prices have continued to rise with little regard for distinguishing longer duration or sustainability. Much the same can be said of stocks, yields have been condensed and risk has been mispriced. We now see the market re-pricing at an individual stock and sector level.
 
There are a few “momentum” themes that are enjoying an upward trajectory such as mining services and increasing infrastructure spending but concerns remain for Australian consumers through low wage growth, retail softness and housing. In these areas, structural challenges are emerging, momentum is fading and top line growth remains low. 
 
Outlook
Reporting season reminds investors that it’s a tough economic environment in need of consolidation, higher productivity and further investment in marketing and capital in order to compete with increasing competition. Opportunities for companies to create a market valuation uplift from announcing measures such as cost cutting, buybacks or higher dividends still seem to be present, but it feels later in the cycle and investors are becoming more discerning. 
 
The Fidelity Analyst Survey released earlier this year reported that the recovery was broad and corporate fundamentals were improving everywhere. Sector exposures as an outcome of bottom-up stock picking are consistent with this, exhibiting overweights in Technology, Healthcare, Industrials and Energy with underweights in Consumer, Real Estate and Telecoms. The Fidelity Future Leaders Fund is currently positioned for global growth and key picks include technology and healthcare leaders, global industrial footprints and new fintech disruptors. 
 
Today there are evolutionary and revolutionary changes that will affect many industries. New energy, new retail, new entertainment and new fintech to name just a few will cause major disruption to the way we live and behave. Amongst these companies will be the Future Leaders of tomorrow.
 
 
 

References to specific securities should not be taken as recommendations. 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

 

This website is intended to provide general information only and has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information and consider the relevant Product Disclosure Statement for any product named on this website before making an investment decision.

© 2017 FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340.
Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund mentioned in this document. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, and the Fidelity International logo and F symbol are trademarks of FIL Limited.