The economy has a sniffle, but we see opportunity

This article first appeared in Livewire markets on 15 September 2023

The recent Australian reporting season was highly anticipated given the swag of companies downgrading earnings expectations in the weeks leading in. What ended up being a fairly muted season was quite telling about the state of the Australian economy and the outlook going forward.

According to Casey McLean, portfolio manager for the Fidelity Australian High Conviction Fund, it’s far from doom and gloom.

“The Australian economy has gotten a bit of a sniffle, but they’ve popped a Codral and they’re soldiering on at the moment,” he said.

The Fidelity base case is that we avoid a recession, though McLean notes that the key to this is unemployment, particularly if it rises above 4.5%. Reassuringly, he points out there is room to cut interest rates in order to manage the labour force amid a population surge.

McLean takes an optimistic slant on the economy, viewing pockets of opportunity in cheaper defensives (like maintenance) and improving dynamics in sections of consumer discretionary companies (like home electronics). He also sees some advantages to be had from stickier services inflation by investing in those companies with the ability to pass on cost pressures, such as in telecommunications or insurance.

In this episode of Views from the Top, McLean shares his key take outs from the Australian reporting season, the opportunities he sees and a few stocks he likes in this environment. He also shares why he views small caps as being cheap at the moment.

Topics discussed

0:00 - Introductions
0:29 - Key messages and market reactions from the Australian reporting season
3:15 - Fidelity's portfolio in light of reporting season
3:59 - The 'less-expensive' defensives that Fidelity likes
4:37 - The weakening consumer market and why consumer discretionary stocks bounced
6:39 - How the services sector benefits from inflation and the stocks Fidelity prefers
10:50 - Why small caps are looking cheap
12:20 - Corporate activity and IPOs in Australia
12:55 - The company result that most impressed Fidelity
15:03 - Health check on the Australian economy