Australia’s ASX 20 has seen a significant valuation increase of 51 per cent over the past three years, but Yarra Capital Management chairman Dion Hershan notes a concerning disconnect. This valuation jump has occurred alongside a 19 per cent fall in earnings for these leading companies. Hershan’s analysis reveals that 14 of the 20 companies are expected to earn significantly less this year compared to their past performance, with eight potentially earning 25 per cent below their prior peak.
Hershan suggests the popularity of passive investing and substantial superannuation fund flows have outweighed fundamental investing measures. He also points to Australian investors’ loyalty, leading them to overlook significant structural shifts in industries. He illustrates this with examples of Woolworths, Woodside, and Westpac, which have not provided returns to investors over long periods. Woolworths is a major supermarket chain that provides groceries, everyday needs, and general merchandise. Wesfarmers is an Australian conglomerate with interests spanning retail, chemicals, energy, fertilisers, and industrial and safety products.
According to Hershan, traditional views of companies are outdated. He argues that investors must be “paranoid, disloyal and focus on identifying what might be current or future broken blue chips”, instead of blindly trusting they are safe investments. He highlights the changing competitive landscape for supermarkets, the rise of mortgage brokers in banking, and China’s evolving commodity demand as critical factors investors need to consider.
Hershan favours mid-cap and small-cap stocks for their greater growth potential and less reliance on the macroeconomy. He mentions ResMed, Xero, and NextDC as companies with strong growth prospects, along with Orica, TPG Telecom, and Carsales owner Car Group. He notes that the earnings malaise in the ASX 20 might reflect a broader economic issue in Australia, with companies displaying risk aversion and underinvesting in capital expenditure.
