Latest / ausbiz a.m / 21.09.26 with John Lockton, Sandstone Insights
Transcript
- Juliette Saly: Good morning and welcome to the Osbiz AM podcast. It's Monday, September 21st. I'm your host, Juliette Sali. Well, Wall Street finished Friday mixed with the SP 500 edging higher and the Nasdaq also in positive territory while the Dow Jones slipped. Investors remain focused on the outlook for interest rates with bond yields rising and markets weighing the prospect of rates staying higher for longer. Here in Australia, the selling looks set to continue. ASX 200 futures pointing to a 0.7% fall at the open. That would extend the September sell-off that's already dragged the benchmark almost 4% lower and wiped out its gains for the year. The pressure coming as investors increasingly price in further RVA rate hikes to tap to tackle stubble stubborn inflation. Let's get more on what to expect to kickstart the trading week with John Locton from Sandstone Insights. Good morning, John. john: Morning, Sally. Juliette Saly: and so we are expecting John for a a negative start to the trading week. Just talk us through the sentiment here. john: Yes, I think you summed it up well in terms of outlook for for rates with traders looking at potentially two rate hikes here before the end of the excuse me, before the end of the year. more pressingly though, it's the concern in the Middle East around oil prices, which I think will will will will control the tape today. We saw some significant kinetic action over Fry over Saturday and Sunday in in in Russia from the Ukraine situation there, taking out some major refineries in Moscow which supply a decent chunk of that region's oil refined product. So that just further tightens up global refined product markets. So a lot of people will be watching to see just what the what the price reaction of of that is today. Juliette Saly: And so with that in mind, we've got a lot of energy stocks, so in some sense maybe the sell off will be somewhat contained, but we do, as I mentioned, seem to be just on a very negative tone this month and it's a lot about these expected rate hikes as well. john: Yeah, I think there's two reasons going on here. One, you know, results season w was was neutral in our view. It didn't lead to a round of earnings upgrades, which is not the case in in other in other geographies. So I think that's an important important backdrop. And then, yeah, the the the pressure which we're seeing from rising bond yields are then a change at the short end of the curve in terms of inflation, sorry, rate expectations with the market fully priced, you know, for for September, which is of course Tuesday next week. and then depending on the day, significant pricing for a further rate rise towards the end of this this calendar year. Juliette Saly: Does that make you want to just stay away from consumer discretionary stocks? john: yeah, consumer discretionary stocks are already pricing in, or to in in my book a significant pricing in of a slowdown in earnings. Now, whether that eventually, Juliet, is is yet to be yet to be seen. We saw trading updates through through August which remained for the most part pretty robust. so you know, it looks to me as though some of the consumer discretionary stocks, whether it's a Nick Scarly or a JB HiFi, to a lesser extent West Farmers, that they're already pricing in at a significant slowdown. Now whether that eventuates or not remains to be seen. Juliette Saly: So what should we be looking out for this week? we've got the August jobs data obviously, and that's sort of the final piece ahead of the RBA decision, but what else is on the radar? john: Yeah, so I think globally, there's a key couple of key events there we should be we should be watching. You know, from a geopolitical perspective, we've got US president and Chinese president meeting in in New York. excuse me, we've also got from a markets perspective, we've got the flash PMIs out midweek, which will give us a bit of a sense as to, you know, what type of momentum we we have in the in the global economy. For the most part, momentum still remains still remains very strong. and and the third area I'd be looking at is post the FOMC meeting last week where they raised rates in the US. expect to see a wall of of Fed Fed governors communicating what their thoughts are post post post last week. So that would be the three things I'd be looking at. There's a handful of US companies reporting, but we're in that kind of lull period in terms of in terms of corporate news flow. ahead of three Q results which are what another two two and a bit weeks away. Juliette Saly: I did want to talk though about how Sandstone is positioning. You mentioned there that reporting season, in your view, was fairly neutral, but we did see a bit of a re-rate in the healthcare sector. How are you viewing some of those names? john: Yeah, I think healthcare sector obviously th the the leading stock within the sector from market cap market cap perspective, CSL, you know, i is well off the lows of three or four months ago. And, you know, from a result perspective, I'm sure it was been well covered across your across your network, but the result, you know, just failed to failed to disappoint, which is a nice way to say it it met expectations and and that and that helped underpin the share price. I think I think the the view across healthcare is that the the sector itself looks relatively cheap. obviously it has very little impact from potential further rate increases or rate rises. so I think investors are trying to position potentially for the next turnaround there. So Ramsey Healthcare I'd call out there. The other stock we we like at the moment, particularly from a yield perspective, is is Sonic Healthcare. It's the first time in many a year that we've actually been on the front foot recommending Sonic. you know, business trades at about fifteen times, you know, dividend yield through five and a half percent. And again, there's not much growth being priced in. not saying growth accelerates, but it seems that pricing is is perhaps taking a more bearish stance than than than what the real what than what the reality is. Juliette Saly: What about the outlook for tech stocks, particularly when we're focused on these rising bond yields and the ongoing AI phenomena phenomenon? john: Yeah, I think the the the challenge for for Bonnyels, and we did some work last week for for subscribers on our on our website is you know the rise in yields post the first Fed rate rise of a cycle can can continue for some period of time post you know post the the the Fed to t Fed tightening. And that generally presents a headwind for growthier type stocks, which of course tech is. So I think that's been one of the big frustrations from investors through the course of calendar twenty six here in Oz is that for the most part, you know, earnings, EBA DA, revenue, et cetera, have remained reasonably reasonably sound, but it's been the D rate in terms of the multiple. So what investors are prepared to pay. And I guess what our work showed last week, Juliet, is that that that pressure from a D rate because valuations or bond yields are going higher can remain for Yeah, probably another three to six months post the first rate rise, which we saw last week from the Fed. So I think there it it still remains a little bit challenging to say, hey, let's just buy the entire sector, because you've got that threat or that impost of of higher long-term bond yields. One name we do like at the moment, not quite in the tech, but adjacent is Seek, the platforms business, the the employment platforms business. it's not so much an acceleration in jobs. job volumes that we're looking for there, but there's a number of assets within that business which are up for sale, which the market is ascribing very little value to. And we think that if SEAT can demonstrate a number close to fair market value, that potentially there's, you know, a a a number of about a billion dollars worth of asset sales on a market cap of just under five. So that would we think that would be a challenge to the bears on the stock which think you know, the the the the valuation of some of those assets is is overcooked. or in fact that, you know, there is no you know, the the valuations are much lower because of the threat of AI. So that's one we would like bit contrarian, but with potential for asset sales, it looks pretty interesting. Juliette Saly: amidst all the uncertainty, a lot of focus as well on what we're seeing in the metals market, particularly gold. Any interest in any of the the gold players or have we seen quite a bit of a a run up here? john: Yeah, gold also can often have a little bit of challenge with rising rising cash rates in the US. I think one which looks or one of the Aussie names which actually looks quite interesting, Evolution. they had a a a side tour last week where many investors and analysts visited their their assets. And I guess the the message which the management team was trying to leave the market from evolution's perspective last week was that Don't give up on us. We're not, you know, we don't have we're not X growth. We do have production growth, we do have volume growth, which can come through you know, over the next three years. It does require obviously additional expansion and approvals, et cetera, et cetera. But that was really the key message. and importantly, a lot of that growth which which evolution was talking about is copper. And obviously copper is is the preferred metal. electrification, energy transition, AI, et cetera, et cetera. So I think that looks reasonable. I'm not gonna say it's it's it's a dirt cheap prospect in terms of evolution. I think it's about fair value, but I do think there is an opportunity here, simply because, you know, the the market had somewhat given up on forecast production growth. and I don't think that that's quite the case. I think that will change over the course of the next two to three years. Juliette Saly: Fair value, yeah. All right, John, we really appreciate your time. As always, John Locton from Sandstone Insights. That was the Osbiz AM podcast. And you can of course catch up with all the business news on osbiz.com.au. john: He's going.