Latest / ausbiz a.m / 24.08.26 with John Lockton, Sandstone Insights
Transcript
- Andrew: And good morning. Welcome to your morning wrap from Ozbies setting you up for the day on the Australian share market. It is Monday, August the 24th, and we're expecting a strong start to the week. ASX Futures up around half a percent. And in a moment, we'll preview the day ahead with John Locton. But first though, a quick wrap of where global markets finished on Friday, excuse me, the Nasdaq. That climbed about 0.3%, snapping a five-day losing streak, the SP up 0.4%, the Now up almost 1%. And healthcare names such as Merck and Johnson <unk> Johnson did the heavy lifting. Tesla up 5% after Nevada approved its Robo Taxi permit. And despite Friday's bounce, all three majors finished the week in the red. That was after that bond sell-off weight on risk appetite. And ahead this week, NVIDIA results, that will be a key, obviously. Among the commodities, Brent Crude up to $94 a barrel. Gold has continued its ascent to be above $4,600 an ounce. Bitcoin also continue its resurgence to be up another s ⁓ up to ⁓ above seventy seven thousand US dollars. And the Aussie that's trading above ⁓ what seventy two US cents. Well let's now get across the market moves. Joining us John Locton from Sandstone Insights. John, good morning. john: Morning, Andrew. Andrew: So where do you think we're at at the moment, just you take a look at what happening on Wall Street at the moment? ⁓ obviously there in the tail end of earnings, but at that key result too this week in video. john: Yeah, NVIDIA Jackson Hole this week on the cards. ⁓ I think my view around where markets are at as we go into the second half now is that we've got just properly strong earnings and it's that earnings backdrop globally. ⁓ it's not just the US, but it's it's Europe, it's Asia, and to a small degree Australia. w with corporates just showing, you know, best in class level of earnings growth that we've seen for, you know, almost two decades. So that's both the rate of change in earnings for for for twenty six, but also expectations for earnings for twenty seven. And w we're saying to investors, Andrew, that that is really the North Star in terms of equity investors at the moment. And that is stronger than, you know, the threat of bond yields ⁓ and stronger than the threat of, you know, the geopolitical and the noise you see around, particularly the US administration. And ⁓ you know, they're kind of topsy turby policy or imp policy implementation. So that earnings growth is broad based. ⁓ that earnings growth is obviously powered by a number of factors, ⁓ you know, AI being one of them, ⁓ fiscal policy being stimulatory right around the world. And as we would see it, Andrew, that that policy rates, ⁓ interest rates, particularly at the short end, ⁓ you know, they're not aggressively tight. So, you know, you could argue in many cases they could be tighter. To to control inflation, but it it's not significantly dampening activity. And more importantly, from a corporate earnings perspective, for the most part, it's not dampening earnings. You know, interest rates aren't punitively enough to have corporates with with higher interest charges. So I think those three factors underpin what looks to be a pretty robust earnings outlook for both ⁓ the rest of calendar twenty six and into twenty seven. Andrew: ⁓ John, I was mentioning healthcare did very well on Friday. ⁓ there. Of course, we've seen a bounce back here too, given ⁓ what we've heard from some of those majors, including the likes of CSL and ⁓ Cochlea Resmed. How are you looking at that sector at the moment? john: Yeah, I think it's an interesting point, almost a point of inflection from investor sentiment. And we've seen a lead in the US really over the last six months or calendar year to date where US healthcare, depending on the day, is a top three performing sector calendar year to date up pretty strongly. ⁓ you know, really for US specific reasons. But, you know, the Australian investors, particularly the global stocks from, you know, CSL, Cochlea, ResMed do pick up. some of that global or particularly that that US US sentiment. But locally obviously CSL, you know, four, four plus percent of the index. So a lot of people watching it, ⁓ you know, share price down excuse me, over two-thirds ⁓ from peak to trough. ⁓ so a lot of people watching that and we've seen the stock since that low of ninety-five ⁓ back in June, July calendar twenty-six, that stock's now up well over ninety percent off off the low. And That's really a a function of where sentiment got to. You know, this is a stock which traded at forty times earnings down to call it ten times earnings. And we've seen the first result under Gordon Naylor, which didn't result in earnings downgrades for the street. So ⁓ you know, CEO former former management brought in as CEO as a fix it man, ⁓ a disastrous first result back in back in February under ⁓ Gordon, who was just appointed, and then a cleanup exercise over the last three or four months. And then we've left with a result which said to the market that CSL ⁓ is not facing a market where there's oversupply of blood products. ⁓ it's really CSL's execution, not a market function, and there was better execution on display. So, yeah, the market's anticipated some of that, and and from here you're looking at a stock with mid single-digit earnings growth. Andrew: And and for you know it's about weakness together. john: on a multiple at the moment, seventeen, eighteen times, well below that kind of twenty five to thirty five average. Andrew: John, I also see you note that ⁓ you're focusing on some of the stocks that are actually pushing up prices at the moment, given their flat volume growth, ⁓ the insurer is among them. john: Yeah, we've seen that from both IAG. Sorry, seen that from both Suncorp and QBU here who have reported IAG you know is also doing the same. ⁓ and but but it's broader than that, Andrew. You you look through some of our big blue chip industrials, you know, Telstra's doing the same. You think about their mobile network, ⁓ which now goes through annual price rises and they're pushing through price rises there, still growing customer count. But not at a not at a heady level in terms of customer count. You're seeing it in some of the the tech slash platform stocks. You know, this is a well worn well worn path from the likes of car sales, REA Seek. You know, they don't talk about r rising or raising prices, they talk about yield growth, ⁓ which is a nice way to say prices go up for the same service with a few enhancements. ⁓ but you're also seeing it in names like Treasury Wine as well. So ⁓ you know, despite my ⁓ optimism around earnings growth, you know, in many markets, that's not so much a factor of volume growth for for corporates. They're having to manage the price and trying to offset inflation in their cost base. So ⁓ you know, they're pushing up prices and for the most part, that's given the backdrop, companies can do that without ⁓ any kind of material ⁓ leg down in in volume growth. Andrew: What do you just I mean, in terms of I guess ⁓ passing on costs and so on, what what what have you made of the r retailers thus far? john: Yeah, so the retailers ⁓ have had a mixed, which is often the case. ⁓ you know, something like JB Hi Fi, you know, punched out ⁓ growth there, which went backwards at the same stores level, which is a rare, a rare feat for JB Hi Fi. But again, that's dealing with extraordinary price rises in one of its core categories, electronics. So everything from mobile phones to to to laptops and ⁓ and tablets, et cetera, et cetera. And some of those price rises are significant. ⁓ you know 35 to 50% on a like-for-like basis, all due to the memory shortage. So a retailer like that struggled, where something like ⁓ you know, in the discretionary space, again, something like ⁓ super retail, ⁓ you know, this was really a function of of management getting ⁓ the Laggard ⁓ in their business back to better performance, which was Rebel Sport, which you know has has a lot of square meterage. It probably underperforms most industry metrics in terms of sales productivity. But they just did a better time of things at getting that part of the business ⁓ moving. And of course the World Cup in the background, Andrew, would have helped ⁓ some of the sales in the in the last part of the quarter. So it's it's it's very mixed. And I think the outlook for most retailers, you mentioned costs, but yeah, you saw that fair work decision back in May, June. You're looking at kind of a like-for-like cost base, ⁓ unmitigated, no adjustments, et cetera, et cetera. of somewhere around four to five percent for most retailers. That's what they're facing into for twenty seven. So, you know, it wouldn't surprise me at all. You're gonna see a combination of of cost cutting from the retailers, but also, you know, they're gonna have to be managing price as well to to offset that cost headwind. Andrew: John, let's ⁓ take a look at the dominant resources sector with most of the majors having reported ⁓ interesting story that's emerged there. Obviously it's all about copper. Obviously gold is making a comeback too. How are you viewing that? john: Yeah, well I think the the the the the construct with resources, we spoke about I guess the cycle for for corporate earnings. ⁓ and resources are playing a key part in in i in that cycle for earnings because they're being relied on to contribute to, you know, a good chunk of this CapEx investment, which is, you know, data centers around the world, but particularly in in the US. So that's part of it. you know, you've got l those long longer dated arguments around a lack of a lack of new supply. And and those things are are kind of meeting ⁓ meeting at a crossroads in in twenty ⁓ twenty five, twenty six and we suspect for twenty seven as well. So, you know, you look at something like a like a BHP, ⁓ where the stocks perform strongly calendar year to date, and you've y you compare that against, say, CBA, ⁓ marked out performance, ⁓ you know, of the commod commodity name. And I think that can continue despite BHP trading at seven to eight times EV EV, EVDA, you know, similar to where it's been at at prior highs. But I do think, you know, the multiple in this environment can stay elevated and and perhaps actually improve. ⁓ and that's i again, driven by, you know, their their copper exposure, driven by just sheer resilience in iron ore. ⁓ but I think at the end of the day, it's the cash generation these businesses are ⁓ are generating. And you Kind of compare that to, you know, some of the leaders in global equities over the last three to five years, ⁓ particularly the US technology stocks, where that cash generation on a free cash flow basis now is zero to negative as they plow that back into AI. ⁓ So from not only from a a demand supply of their underlying commodities, but from an investor perspective, ⁓ you've got this ⁓ dichotomy now occurring where you know, better free cash flow is there in some of those resource names. And think that's one of the reasons we saw US materials on Friday night ⁓ go to go to all time highs. It's that resurgent view around ⁓ basic materials, ⁓ cash generation and where that can go into twenty seven. Andrew: ⁓ yeah, I mean you mentioned ⁓ obviously those resources ⁓ that ⁓ play their part in the decarbonisation, ⁓ the build out of data centers. ⁓ lithium also plays its part too, of course. We do have PLS reporting today. What's your view on lithium at the moment, John? john: Yeah, lithium's come off a very strong first half in terms of price rise. So if we go back, you know, nine to twelve months ⁓ and lithium prices there were well below you know, most analysts' view or industry view of where cost curve support was. So, you know, nine hundred to twelve hundred ⁓ a ton, you know, below third, fourth quartile part of the cost curve. ⁓ and it's been as high as just over two hundred you know, twenty two hundred a ton. Over the last six months. So part of that was to due to ⁓ the oil price, you know, resurgent demand for electric vehicles and batteries. ⁓ you can think hot you see that here in Australia, heightened demand for electric vehicles first half with the oil price backdrop. ⁓ but there was also supply outages in China, ⁓ which is of course the marginal swing supplier. Some of those supply outages have eased. I I suspect the outlook for the near-term lithium price is just not quite as strong as where we were back in March, April of this year. So you you know, what is typically a pattern is that all ⁓ that lithium price tends to be well bid into the tail end of the year as as many, particularly Chinese ⁓ auto ⁓ manufacturers discount ⁓ to meet volume targets for the end of the year and that has a flow on effect into into lithium prices. So A little bit more sanguine on the lithium price short term, but you know, it's not too far away before you go into that seasonal or that typical stuff. Andrew: John, great to get your outlook of what you're seeing on the local market at the moment. Thanks so much for joining us, some sandstone insights. john: All right. Thanks, Andrew. Andrew: And that is your Osbys Morning Wrap. I hope you have a great day. I'm Andrew Gagan. Thanks for listening.