Purpose of the trip
I was keen to meet our holdings to get their latest updates, check out some prospects, touch base with clients, and get a broader first-hand feel of things on the ground in Australia.
Key takeaways
Corporates: I caught up with several of our holdings, and it was encouraging to hear them talk about how they were making efforts to increase their resilience in today’s challenging macro environment of rising interest rates, a tight labour market and slowing economic growth.
Some sectors were feeling the pinch more than others, with cost pressures in labour-intensive segments more apparent in numbers. As immigration continues to pick up, this is expected to alleviate matters a little, but corporates are all keeping a strong eye on efficiencies regardless.
Amid that, the more positive updates came from our resources holdings, which are operationally well despite battling higher input costs and with some looking at renewable energy opportunities. This is a sector that is often simplistically linked to China’s fortunes so it was interesting to hear a fuller picture of other material drivers that are less understood.
For our consumer holdings, easing food inflation has been a positive with buyers turning more value conscious and opting for private brands in a recessionary scenario, albeit Australians are also dining out more after the pandemic.
Across our REIT holdings, there were common concerns over high inflation and rising interest and the impact on capitalisation rates, especially commercial real estate, and debt cost, and a focus on mitigatory measures. Their attractive valuations reflect public market sentiment in a higher rate environment and run counter to what their fundamentals are telling us.
Auckland International Airport: Recovery on track
Moving in the right direction: My meeting with AIA was reassuring, with the airport operator expecting seat capacity to reach pre-pandemic levels for both international and domestic travel by the year end, and passenger volumes to recover fully in FY25. It has been able to sustain higher airfares, given the release of pent-up demand as travellers take to the skies again with a vengeance post-Covid.
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. We are cautious on rate-sensitive sectors and businesses that are just beginning their journey toward profitability. 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.