Ausbil talks large cap stocks post reporting season

Funds Management

by Jessica Amir

Ausbil Executive Chairman and Head of Equities, Paul Xiradis, discusses the large cap segment of the market post reporting season and how the Ausbil Active Equity Fund is positioned.

Jessica Amir:
Hi I’m Jessica Amir for the Finance News Network. Joining me from fund manager Ausbil is Executive Chairman and Head of Equities, Paul Xiradis. Paul, welcome back.

Paul Xiradis: Happy to be here.

Jessica Amir: We’ve just wrapped up 2017 reporting season. How do you think companies performed?

Paul Xiradis:It was a bit of a mixed outcome as far as the reporting season was concerned. There were a lot of groups, which delivered on their expectations and there was quite a few that didn’t. And you saw a fair bit of volatility, which was actually quite extreme this time around, compared to other reporting seasons. But as a whole, it was actually quite a good outcome. Growth was around 13.5 per cent, which was a very good outcome compared to previous years.

Jessica Amir: Now to a comment about capital management and dividends?

Paul Xiradis: Capital management certainly did feature in this reporting season. There was a large number of companies did actually announce buybacks. And certainly the sum was something like about $4 billion, which was higher than that of the previous half. But also what we did see was post the reporting season, Rio Tinto Limited (ASX:RIO) as a example, also announced a buyback of something like about $US2.5 billion. So a very very significant outcome as far as buybacks were concerned, and that overall are quite positive for the market.

As far as dividends, dividends also did increase; they were certainly a feature, but interestingly though, the leadership did change. Where in the past we have seen dividend growth be driven by a number of the industrial sectors, but this time around, we saw it from the resources sector. And the reason for that is that their earnings was actually a lot stronger than the market was expecting, and certainly cash flow also was a lot stronger. Hence the mining companies did actually pay an increased dividend.

Jessica Amir: What impact has the strength of the currency played on earnings?

Paul Xiradis: Generally speaking when we see the currency appreciate, it does negatively impact on a number of different companies that report here in Australia. The reason for that is they do source their earnings internationally. So as a consequence, as the currency goes up, reporters can go down. But despite the currency being quite strong, a lot of the companies, which do have exposure offshore, still delivered a very good outcome. And part of the reason for that is underlying growth in those regions or those countries, continues to be quite strong and outstripping that of Australia.

Jessica Amir: Now to the Active Equity Fund. What recent changes have you made and why?

Paul Xiradis: We have made a few changes over recent months. It’s certainly an area that we have been increasing our exposure. Because we do believe over thenext four or five years that infrastructure spend will accelerate and be at record levels, towards a sector that will benefit, or sectors that will benefit from that. Certainly a couple of stocks that we have identified that should be beneficiaries of that, is Downer EDI Limited (ASX:DOW) as an example, and we do have a pretty good position in Downer now.

We’ve also introduced orincreased our exposure to Lendlease Group (ASX:LLC), to the portfolio just recently. But other areas outside of infrastructure, we do see the banking sector performing reasonably well. It hasn’t reported as yet, but it is due to report late October/early November and we do believe the results for the banks will be quite good. So hence, we’ve actually closed our underweight position just recently.

Jessica Amir: A more general question now, the Australian consumer has been quite resilient for many years. But do you think energy prices will be the straw that breaks the camel’s back?

Paul Xiradis: It certainly is an influence and certainly a concern that we do have. The consumer right now is actually very levered certainly at levels, which we haven’t seen in fact, ever before. So it is actually at record levels. So any increase in costs, such as energy costs, healthcare cost and other cost is certainly having a significant impost towards the consumer. Also at the same time, we’re not really seeing household income grow at all; wages growth has been quite moderate.

So the cocktail of increased costs and also moderate growth, as far as wages are concerned is certainly going to impact the consumer. And we have been quite concerned towards that end and that’s why we have been underweight those stocks and sectors, which are exposed to the consumer here in Australia.

Jessica Amir: Are there any other sectors that you want to mention?

Paul Xiradis: Retail’s a sector that we have been underweight for quite sometime. We’ve been concerned mainly because the consumer, being stretched, as we put it. But another sector, which we are a little bit concerned about, is the housing sector. Now we are of the view, particularly given what I’ve just described earlier, about the consumer being quite stretched and gearing, being at very high levels, we do believe we are now seeing the signs of peaking in housing. So we’re also underexposed or underweight those sectors, which are exposed to housing.

Jessica Amir: Last question now Paul. What’s your outlook for the remainder of 2017 and beyond?

Paul Xiradis: We still remain reasonably optimistic for 2017; the market is up 10 per cent as we speak for the year so far. But certainly there are some concerns, particularly some of those geopolitical risks as we’re all aware of. But despite that, we do believe that underlying earnings growth will continue for the remainder of ‘17, and also into ’18. So we still remain quite optimistic beyond 2017.

Jessica Amir: Paul Xiradis thanks for having us and thanks for the update.

Paul Xiradis: It’s been my pleasure, thank you.