Purpose of the trip

I wanted to get a better feel of where our holdings are and how they see the operating environment heading into 2024. I was also keen to speak to managements of some prospects that we are monitoring, as well as gain deeper insight into the broader macro themes that are driving sentiment and economic activity.

Key takeaways

Big macro theme: Immigration

Through 2023, a key macro theme has been the sharp rise in immigration to around half a million people, from an expected 235,000 forecast in October. This will potentially underpin the economy’s growth and might put upward pressure on property prices, as well as provide some relief from the acute labour and skills shortage. While household consumption has slowed considerably, the population growth will help stem the decline in consumer spending, while preserving resilience in absolute terms. While minimum wage increases and Enterprise Bargaining Agreements will keep wage inflation sticky into 2024, thus keeping the central bank’s policy stance relatively hawkish, the influx of workers in a labour-constrained economy might help alleviate some of the pressure.

BHP: Progressing well away from coal

Source: BHP annual report 2023

Well-thought transition path

Our meeting with the resources group BHP was encouraging in terms of how it is thinking through its transition plan of moving away from coal-related assets and messaging this to connect with the affected communities better. Thermal coal has always had a stigma to it, but being public about its engagement on how best to address this and how they are caring for the transition to new jobs of old coal workers has helped to alleviate the stigma. BHP still retains one thermal coal asset but it is because it could not find a buyer for it. The group will close the mine by 2030 which it sees as an optimal time to close from a value perspective and give it time for a transition of its workforce. Meanwhile, there were also other positives from the meeting. The group indicated that it would keep the dividend payout to a minimum 50% of earnings and regarded this level as sacrosanct, ensuring a stable level of dividend streams for shareholders. Its capex guidance is an indicative range for pipelines and extends to 2026, with A$10 billion this year followed by A$11 billion for the two years after.

Outlook

The domestic backdrop remains challenging, given a slowing economy, elevated inflation and a tight labour market. We expect earnings risk over the short to medium term as economic activity softens and as the consumer adjusts to higher interest-servicing costs.  However, the recent trip has made us relatively more hopeful that the economy is approaching an inflection point and we will look to opportunistically add to quality companies that are ready to benefit from a turnaround in the economy. 

We remain biased towards businesses with strong pricing power and defensive business moats, and we favour businesses with clear growth prospects that are leveraged to long-term structural shifts. Our holdings’ defensiveness (i.e. their robust balance sheets and prospects for generating healthy through-the-cycle earnings and dividend growth) is also a positive. Many of our companies are also leaders in governance and sustainability, positioning them well to adapt to the future. This will ensure that the portfolio remains resilient despite the current uncertain times.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.