Downturn is coming: Warnes' warning for investors |
Tweet | ![]() |
<p><strong>Glenn Freeman: </strong>Thanks for joining us today, Peter.</p>
<p><strong>Peter Warnes: </strong>Thanks, Glenn. Always good to be here.</p>
<p><strong>Freeman: </strong>Looking through some of the – how companies have performed, you've got some interesting numbers there in front of you. But one of the themes has really stood out has been the outlook. So, those companies that – it wasn't about the results they delivered for fiscal 2019, it was on the outlook, and that's what really affected the share price. Can you just explain this for us?</p>
<p><strong>Warnes: </strong>You know, Glenn, going into this reporting season, expectations were wound back a little bit. The confessional was fairly busy, and management had had wound, you know – or softened their expectations. And any company now that came out and the expectation, the market didn't really do much. It was more about what the outlook statement said. And those who were brave enough to put their head on the block must have had some conviction to do that. And if the market accepted and resonated with what they were saying, then you saw some quite nice movements in stock prices within the 24 or 48 hours after the announcement. And those companies that did that, again, as I say, must have had some conviction.</p>
<p>This reporting season has been colored a little bit by offshore influences where you've got markets – high volatility in the markets. And therefore, the real impact in terms of pricing has been affected by what's been happening in the markets generally. So, we haven't got a really, kind of, a clean slate in terms of what the market did after the result because of outside influences. But generally, because of expectations have been wound back a little bit, this was reporting season hasn't surprised too many people in an overall context.</p>
<p><strong>Freeman: </strong>And in looking through the list of those companies under Morningstar coverage that have reported, it was roughly even the number of companies that the share prices come off by 5% and those that have actually seen more than a 5% increase.</p>
<p><strong>Warnes: </strong>Yeah, and that usually happens. I mean, if the market and the economy is on the way up, then you will see a bias towards the positive reactions, because the investor is in a mood where he's going to appreciate what the companies are saying and then give them a little move. Now, this time around – and yes, this time around, you've had, as I said, outside influences. But if you've either missed the expectation, or the outlook statement has been a bit soft, then there have been stocks that have been given a bit of a hiding. Overall, as you say, the number of stocks that have strongly performed in the market within 24 to 48 hours of the announcement basically evenly balanced at this point in time. We've got a week to go but I don't see any change in that trend. So, yeah, it hasn't been too bad. There's been some rough patches, but they've been good patches as well.</p>
<p><strong>Freeman: </strong>You've picked out a couple of sectors that have actually performed particularly strongly, but what are some of the other – what have been the themes across different sectors this earnings season?</p>
<p><strong>Warnes: </strong>Glenn, I mean, the two sectors that have done reasonably well as a sector have been healthcare so far and what we call new media. Now, healthcare being an offensive space, and given the pressures out there in the economy, they've all done reasonably well and of course, see the national ones have done probably the best. So, the big three, Cochlear, CSL and ResMed have all done well post their results. Sonic was a good result and was rewarded by the market, and we've still got a few big ones to come in Ramsay to report later. And so, it was a good result and we lifted our fair value there. But again, a lot of self-help in that situation.</p>
<p>And the other sector has been what we call new media, which are the four, if you like, high profile service companies, Carsales, REA, SEEK, and to a lesser extent Domain, which has coming out of Fairfax. All of those companies did well, and their outlook statements were reasonably comfortable, and the markets embraced them. So, those are the two sectors have done reasonably well. Other sectors, it's been company-specific rather than sector.</p>
<p><strong>Freeman: </strong>One has been up, and one has been down within the same sector.</p>
<p><strong>Warnes: </strong>Yes. I mean, you've seen, like in private healthcare, Medibank Private move higher, whereas nib holdings move lower, because the outlook statement wasn't all that flash, and outlook statements have been, as I say, been driving the market post the results.</p>
<p><strong>Freeman: </strong>Now, among those companies that have got international businesses, China and the trade war has been a theme that has had a big impact. And it's not even as simplistic as – it's not all about China either, it has some big flow-on effects too?</p>
<p><strong>Warnes: </strong>Well, you know, the U.S.-Chinese trade war, if you like, has a big influence on what's been happening out there, but of course, it's affected global trade volumes and global economies. And what you've seen is that those that are exposed to either North America, or Europe, or China have all had outside influences impacting their bottom line. Brambles, exposure to Europe. Europe is an exporting economy dominated by Germany. German exports are falling sharply. GDP dipped into negative territory in the second quarter. So, Brambles have got a problem in EMEA that has to be sorted. And they've also got some issues in CHEP Americas. So, again, a global company exposed to the volume of goods moving throughout the economies. They are slowing and volumes are down, and that's why all the purchasing managing indexes for manufacturing are all sub-50. It's telling you that global growth is under pressure. So, Brambles is a very, very good benchmark for what's happening out there in terms of movement of goods.</p>
<p>You've got Chinese-facing companies like Blackmores and a2 Milk, they came under pressure, again because the – don't forget the Chinese economy is also – growth is slowing there and the households aren't spending as much and of course, margins have come under pressure and volumes have come under some pressure. On the other hand, they are drinking more, and they are drinking better quality, and so Treasury Wine Estates, they did very, very well. Now, what's going to happen going forward is a moot point, but their result was better than expected whereas the other to worse than expected and/or the outlook statement was pretty ordinary.</p>
<p>But there's no doubt that the trade tensions between U.S. and China is reverberating right throughout every economy out there and having an impact. And central banks around the world have got that as their number one problem area. They're all looking outwardly saying, our monetary policy is being influenced by what's happening offshore, not necessarily onshore.</p>
<p><strong>Freeman: </strong>And something also that's reverberating and which you've referred to in your latest, Your Money Weekly is about the lower for longer chorus and how that's playing out and it's affecting otherwise rational investor behavior.</p>
<p><strong>Warnes: </strong>Yeah. Well, what it can do, Glenn, is that if you extrapolate from a low or a high point, that's dangerous. That trend is not in perpetuity. And it's dangerous when you do extrapolate from, as I said, low or high points. And when you fall in love with something, sometimes you're not rational, and I suspect that in the bond proxies, the REITs and the utilities and infrastructure that lower for longer perception is driving people towards yield. In other words, the yield is nice, yes, I'm going to go in there because I'm getting nothing, the (tender) effect. Be careful. In the REIT space in particular, prices now have been pushed to significant premiums above NTA. Don't forget what those companies are. They are property companies. Their asset is property and the valuations of those properties, the valuations are driven by discount rates. The lower the bond yield, the lower the discount rate, the higher the valuation. Be careful. I'd be very, very cautious. So I wouldn't be putting any new money into the REIT space at all.</p>
<p><strong>Freeman: </strong>And just finally then, so having said all of this, where should investors be looking right now, which sectors, or indeed should they be leaving it in cash?</p>
<p><strong>Warnes: </strong>Well, it's very difficult. I haven't seen and I don't think followers of the markets have seen these conditions in our lifetime, and I've been looking at these markets now for 50 years. Look, we've had a (bridge of) pretty reasonable run. We've touched the record only just a month ago. You are allowed to live off capital for a certain period of time and I think that the way the markets are place currently your margin of safety is wafer thin. I'd be very, very careful. I'd be letting cash build. I wouldn't be reinvesting my dividends and where you've got overweight positions in some particular stocks, I'll be taking the tops off. I'd be squirrel like; I'd be grabbing a few nuts in the summertime and put away for when these markets do turn. And turn, they will; it's just a matter of what's going to trigger it. There's a lot of influences out there outside the U.S.-China situation. You've got Brexit, you've got Germany, you've got Hong Kong. The wave is building and when the wave crests, the higher the wave, the bigger the washout.</p>

24/06/2022 "I think over the next sort of, three, six, nine months, we're going to see some pretty good opportunities emerge, and I think investors who are well prepared will be able to take advantage of that."

23/06/2022 Policy will continue to fuel short-term price movements but the long-term fundamentals for Australia's biggest export look shaky.

17/06/2022 The founder of Investors Mutual is cool on Australia's banking giants.

15/06/2022 Faster interest rate hikes from the Reserve Bank have markets worried about bad debts, says Morningstar banking analyst Nathan Zaia.

14/06/2022 Highly likely investors are on the cusp of an era of permanently higher rates that should favour "real-world companies", says Andrew Clifford, co-chief investment officer at Platinum Asset Management.

14/06/2022 Build cash and prepare for opportunistic nibbles at companies such as Aurizon, Wesfarmers and James Hardie, says Morningstar's head of equity research.

10/06/2022 We haven't seen the bottom of the bear market yet, says Morningstar's head of equity research.

01/06/2022 Earnings growth remains market leading for wide moat stocks like Alphabet, Meta Platforms and Amazon.

30/05/2022 Labor looks set to proceed incrementally and existing producers such as Whitehaven Coal could even benefit should more radical policy be proposed.

25/05/2022 The Nobel prize winner who cameo'd alongside Selena Gomez in Hollywood hit The Big Short discusses the latest developments in behavioural economics.

19/05/2022 Local investors were spooked after US retail giants Target and Walmart plummeted overnight as rising prices hit margins and inventory.

19/05/2022 On his recent visit to Australia, Morningstar's global chief investment officer Dan Kemp talks investing narratives, confronting the growing list of reasons to be concerned about markets and sustainable investing.

19/05/2022 Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.

18/05/2022 One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?

11/05/2022 Here's what investors who are worried about a recession should consider today.

11/05/2022 Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.

29/04/2022 Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine

28/04/2022 Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.

27/04/2022 Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.

31/03/2022 Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.

30/03/2022 Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.

28/03/2022 Where are entertainment and streaming services headed?

24/03/2022 Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.

23/03/2022 Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.

17/03/2022 Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls

15/03/2022 Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.

08/03/2022 Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.

03/03/2022 Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.

23/02/2022 Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.

23/02/2022 A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.

15/02/2022 In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.

13/02/2022 Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.

31/01/2022 The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead.

23/01/2022 Christine Benz discusses how investors should handle the turmoil, whatever the life stage.

18/01/2022 Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul.

17/01/2022 Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.

24/12/2021 Our experts and analysts weigh in on what mattered for investors last year.

21/12/2021 New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship.

10/12/2021 And how does it match up against gold?

10/12/2021 Australian miners to be among the last standing as coal use fades.

08/12/2021 Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation.

03/12/2021 The gold-rated fund manager shares three ideas with long-term potential.

01/12/2021 Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.

30/11/2021 To understand your fund, get to know its underlying index.

29/11/2021 These companies are set to profit from the move to clean energy, says Lazard.

24/11/2021 The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.

17/11/2021 And how investors can protect their portfolios.

08/11/2021 Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.

05/11/2021 Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.

19/10/2021 These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.

15/10/2021 The ESG outperformance narrative is flawed, new research shows.

06/10/2021 Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.

01/10/2021 And how G8 Education and Link Administration are positioned for long-term success.

30/09/2021 What Reporting Season August 2021 told investors about the health of the financials sector.

28/09/2021 a2 milk is an opportunity to be greedy when others are fearful.

23/09/2021 Covid's winners and losers are returning to their prior trajectories.

21/09/2021 Sequence-of-returns risk matters for both retirees and savers. Here's why.

20/09/2021 Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.

15/09/2021 Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.

14/09/2021 Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.

13/09/2021 Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle.

10/09/2021 Hydrocarbons poised for a comeback.

09/09/2021 Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.

08/09/2021 What shorting ETFs means for long-term investors.

07/09/2021 Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.

03/09/2021 Miners bask in the glow of iron ore prices while bargains remain in coal.

23/08/2021 Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.

16/08/2021 But the sector lacks uniformity, says Morningstar's Christopher Franz.

11/08/2021 Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.

11/08/2021 Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.

10/08/2021 Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.

05/08/2021 We believe the transaction has a high chance of succeeding.

03/08/2021 The industry still has significant growth potential.

03/08/2021 Is one of the biggest sponsors of the Olympics positioned for an all-electric future?

23/07/2021 Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.

22/07/2021 Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.

21/07/2021 The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.

20/07/2021 The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.

12/07/2021 Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.

08/07/2021 Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.

08/07/2021 Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.

06/07/2021 Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.

02/07/2021 PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.

30/06/2021 Iron ore prices have been on a tear, boosting the profits of Australia's top miners. How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.

28/06/2021 Morningstar has recently initiated coverage of a food delivery app and a consumer finance product.

24/06/2021 Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.

22/06/2021 Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig

21/06/2021 Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.

18/06/2021 A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.

15/06/2021 Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.

11/06/2021 Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.

10/06/2021 Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.

09/06/2021 Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.

08/06/2021 They’re building an empire.

07/06/2021 A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.

04/06/2021 As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio

03/06/2021 The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.

28/05/2021 4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.

28/05/2021 The SEC continues to sort out its regulatory concerns.

27/05/2021 We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.