February 2018 results season were reasonable. Generally, there were a few more results that ‘beat’ expectations versus those in line or disappointed, which suggests expectations were realistic. Hot spots remained on similar themes and delivered solid outlooks in the areas of mining services, construction, consumer services, infant formula (such as a2 Milk and Bellamy’s), global agriculture (such as Costa Group) and software. On the other hand, soft spots continued in traditional retail (such as Myer), telecommunication services (Amaysim Australia) and the challenged roll-ups (such as legal services).
Stand-out performances from companies such as a2 Milk, Altium, Corporate Travel Management and Appen show there are some brilliant leaders in the Australian mid and small caps arena that have built a uniquely valuable differentiated asset that have the viability, sustainability and credibility to become the future leaders of tomorrow. Outstanding performances over 10-year periods include global structural growers in healthcare, technology and consumer services such as Cochlear, Resmed, Fisher & Paykel, REA Group and Seek.
Despite some concern around equity valuations, valuations and growth outlook appear reasonable at 16x PER for 10% EPS growth, 3% dividend yield and Price to Book of 2.0x. Likewise, Australian medium-term growth and recent global indicators continue to provide bullish signals in mining, construction, employment trends and general business conditions. Combine this with expected low inflation supports the thesis of synchronised global growth and the benefits of the “Goldilocks environment” that remains not too hot and not too cold.
However, from a global perspective, there are growing concerns that risk is mispriced. Bond yields are rising - now near 3% compared to only 2% only a few quarters ago - and the VIX index, more commonly known as the ‘fear index’ has lifted from decade lows. The ‘Fear of Missing Out’ (FOMO) is fading as uncertainty rises globally. Locally, there have been a number of technology and micro-cap stocks that were beneficiaries of liquidity and high risk tolerance which are enduring major setbacks or have been wound down completely. Winds of change seem to be signalling to investors to consider risk much more now than in the recent past.
Specifically, for the Future Leaders Fund, risk has been deeply considered when sifting through the mountain of financial accounts and presentations of results season. The sustainability of business models and cash flows, as well as valuations, is an acute focus. Within the Future Leaders Fund portfolio this means that some high free cash flow yielding value opportunities have been increased; long duration transition opportunities with firm underlying asset values continue to be held or increased to create balance with the best valuation and growth picks of the market in momentum and quality.
Since the December 2017 ‘From the Desk of’ report to clients, there has been more talk of trade wars and deals, increasing expectation of rising interest rates in the USA and the winding back of quantitative easing by many countries. 2018 is emerging as a transition year compared to the galloping bull market of the last nine years. Portfolio balance and structure may be the critical drivers in 2018 as volatility rises, discount rates rise and convictions are tested.
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.
Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.
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.
© 2018 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.