Mark LaMonica: Welcome to another edition of Market Minute. I’ve got Matt here to talk about earnings. So we’ve heard from US companies. We’ve heard from Australian companies. We want to hear what you think. Why don’t we start in Australia. Just some impressions from results season.

Matt Wilkinson: Yeah thanks Mark. So we’ve seen a mixed bag out of a strain companies in this reporting season. There’s been some good numbers out of Woolworths in particular. However overall X the resources which has again been a stellar driver of earnings in this reporting season, it’s actually been quite muted in terms of earnings growth. It’s only been just about around inflation level.

And now that’s been in contrast to what we’ve seen in the US where revenue and earnings have been very, very strong. And actually net margins have been toward the top end of historic levels too. So the US has been a very strong area for for growth and reporting season has been very impressive there. On the other side of that, Australian companies have been mixed across the board.

Mark: And if we look at Australian companies, I guess particular, particularly the miners, the banks, what’s going on there? You know, we’ve seen, I think, as you alluded to, the very strong performance from the miners, I guess maybe not so much just from a share price perspective from the banks. What’s happening there?

Matt: Yeah. Well, we saw, for example, CBA deliver a very strong result from an earnings perspective. However, the market has rotated out of financials, those banks in particular, and rotated into resources BHP and Rio. So share price returns have reflected that. That’s been that that rotation has been very strong, although revenues have been sort of pretty strong. But the market has gone okay.

Valuations have been stretched more stretched in banks and they’ve seen better value in miners. And CBA has been trading on sort of 25 times there or thereabouts. And the rest of the markets trading on sort of high teens. So that’s been the impetus for that market rotation.

Mark: Let’s turn our attention to the US. So you said overall results have been very good a lot of earnings growth. But I guess break that down a little bit. Where are we seeing that growth. What are the drivers.

Matt: So that market is much more concentrated as we know through the Mag seven. And I’ll just give you one example that Nvidia just reported the other day again. And I’ve said I think in this market in months gone past, the numbers are staggering. Their revenue has been at a run rate of about $1 billion a day over the quarter.

So they they recorded revenues of I think it was $96 billion for the quarter. The market was also very impressed with the forecast for the following quarter, which has been upgraded to $108 billion in revenue. That’s just a staggering amount of money. But what it does show you is that those those hyperscalers are investing in data centers. They are investing in in the chips that veneer are producing.

And that’s driving, you know, much of the much of the market now, now that investment in data centers.

Mark: So and when we sit there and and look at going forward I guess nobody obviously knows exactly how long this will last. Guess. Is there anything you’re hearing out there, anything that you guys look at in terms of, I guess, the duration of this AI build out?

Matt: It’s that’s a very tough question to to to answer. And there’s a lot of uncertainty around around that. But I think we have a certain amount of visibility over the next few years that those hyperscalers will be investing, you know, each of them hundreds of billions of dollars into AI. So we probably have a reasonable amount of visibility for the next 3 to 4 years.

But 2030 and beyond, it’s obviously further out becomes a bit of a crapshoot, so to speak. But there’s at the moment, the market is investing. Those companies are have confidence that revenues will follow their CapEx bend. And that looks to be playing out to date.

Mark: So one thing that continues to be in almost every news cycle is inflation potential central bank responses. We’ve heard some news out of the US in Australia I guess. What are the expectations that investors have for central banks and how is that going to impact portfolios.

Matt: So what we’re seeing is inflation expectations higher in Australia definitely higher compared to the US. And the market is actually expecting a rate hike in September now in Australia now as interest rates go up, obviously the market’s repricing bonds long and bond yields are actually ticking up. In Australia it’s greater than it’s over 5%. In the US it’s over a 4.7.

Matt: Now for investors it’s not a bad thing because your forward expectation return is actually quite high. And you know the average global bond portfolio is is probably, you know, has a yield to maturity of about 6%, maybe 7%. And for those investors, that’s not a bad return going forward, particularly when you consider kind of risk expectations around equity.

Matt: So that’s something to be weighed up. And for diversified investors it’s like it gives you a good opportunity to diversify across your portfolio.

Mark: And then maybe just talk a little bit about your guys view of the world, how you’re managing portfolios. I know some investors are obviously very excited about this growth. Some are little uneasy. We hear bubble talk. We see at least on the margins, some speculative behavior, I guess. How are you guys looking at portfolios and what are some good tips for investors.

Matt: Yeah. So when there’s a lot of dispersion about potential outcomes for individual companies and markets, the best thing to do is to have a sense of valuations across markets. And we do that very well. We also are very diversified. That’s really important. All investors will make mistakes at some point in time. However, it’s it’s very difficult to to know when the music stops in these situations.

And, you know, there’s potential for for people to miss out on outsized returns. So diversification is key for the Middle East. Portfolios that I look after are diversified across asset classes, across managers and managers styles. So we have we’ll have allocations to at that end of the market that might be considered expensive, but it’s also then into the market that’s actually growing quite strongly.