Quietening the noise: 5 things investors need to hear

Rhett Kessler

Pengana Capital Group

One of the main observations from this past reporting season relevant to the remainder of 2020 was the unusually high level of noise. This was undoubtedly one of the side effects of COVID, but instead of dismissing it, Pengana Capital’s Australian Equities Fund took the opportunity to learn from these unique events.

We found that the business momentum was vastly different in the first three quarters of FY20, compared to the last, and that companies with digital value propositions accelerated and did well in the last quarter. On the other side of the spectrum, there was a whole host of companies that collapsed in the lockdown due to the negative impact it had on their businesses, particularly in industries such as travel, hospitality and events.

Here are the five trends that emerged from the reporting season this year:

  1. No guidance. One of the main reasons investors look at earnings releases, or earning results, is to see if they can use them as a base for predicting the future. Unfortunately, this reporting period did not garner such useful information, as most company management teams withdrew their guidance. Certain companies inform their funds manager on what they might do, which can be a luxury, as it is really their job to predict and work it out themselves.
  2. Downsides to government aids. Since the start of the pandemic, there has been no doubt that government stimulus packages such as JobKeeper and JobSeeker were an enormous help. There were also huge cash flow benefits where governments provided plenty of liquidity by allowing companies to pay their tax at a later date, while also accelerating their own payments into the system. From our findings, these cash flow benefits are likely to prove to be unsustainable.
  3. Fears of geopolitical risk. There has been increasing concerns in the industry about escalating geopolitical risk. Apart from the political landscapes of China or the US, there is the impact of COVID in certain societies, where there is an already magnified difference between the haves and the have nots. The US is a clear example of one of those areas but there are places where difference has been further exaggerated such as South Africa, India, Indonesia, and Brazil.
  4. From up to down. In this industry, things can turn almost 180 degrees in a very short period. There has been an instance where the market not only corrected with a big interruption in business momentum, but it bounced back enormously. To some extent, the industry is now trading above fair value, as there is a lot of exuberance around. All in all, there have been years when nothing has happened and then there have been weeks or months with a year’s worth of events. Certainly, the latter is what has happened recently and there is still a learning curve ahead of us all on how best to navigate through this.
  5. Changes in consumer behaviour. The impact of lockdowns on consumer and business behaviour was enormous and will have long-lasting effects. With everyone having to stay home, e-commerce sales have gained traction, not only in retail but also in necessities such as groceries. However, we have seen some reversion of online shopping in Western Australia and South Australia where life has almost returned to normal and online sales behaviours have seemingly not stuck.

Case study

Despite a noise-filled reporting season, our investment team decided not to waste a crisis but to see what could be learnt about who has the power in every stakeholder relationship. Look at omnichannel retailers, they can sell goods online as well as in a physical store. The power they have against their landlords is certainly more powerful than if they were to just have a pure brick-and-mortar plan. For instance, JB Hi-Fi operates within the retail environment through a store as well as online, which meant they were able to negotiate incredible outcomes with their landlords. 

Learn more

The Pengana Australian Equities Fund provides exposure to a high conviction portfolio of listed Australian companies. Stay up to date with all my latest insights by clicking the follow button below. 

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Rhett  Kessler
Fund Manager, Pengana Australian Equities Fund
Pengana Capital Group

Rhett is the CIO and Fund Manager of the Pengana Australian Equities Fund, and joined Pengana in October 2007, bringing with him over 18 years of experience as an investment professional at the time.

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