The Point

Aussie equities: Why it’s smart to take the long-term view on M&A deals

Newspaper headlines have been full of merger and acquisition activity and associated capital raisings in recent months.

Chemist Warehouse-Sigma Healthcare. Brookfield-Origin. Newcrest-Newmont. Allkem-Livent. Woodside-Santos.

The activity is likely to continue in 2024, especially in the resources space.

Investors haven’t always been impressed with recent deals – but that doesn’t mean there isn’t opportunity, says Anthony Moran, an analyst with Pendal’s Aussie equities team.

“Markets tend to overreact, especially around M&A. That’s exacerbated at the moment with fears that the economic cycle is rolling over.

“Investors are concerned that companies are buying businesses that may have puffed up earnings or been trading on a cyclical peak.

“But if you can do the work on the acquired businesses and start to get an understanding and more informed perspective on the probability of the success of a deal, then a sell-off can be quite an attractive investment opportunity.”

Jim Taylor: What’s driving ASX stocks this week

Crispin Murray: What’s driving ASX stocks this week?

Most people would be aware from last week’s per-capita recession headlines that Australia’s population growth is outstripping economic growth.

But population growth – especially immigration and temporary visas – is also supporting corporate earnings, says Pendal’s head of equities Crispin Murray.

“All up, we’re probably looking at about a 3 per cent rise in the population today versus a year ago.

“People are coming to Australia with money in their pockets, setting themselves up and getting accommodation – which is driving up rents.

“Part of the reason we’re seeing resilience in the top line of companies is because they’re basically driven by nominal GDP, not per capita GDP.”

Population growth is also offsetting the effects of the ‘mortgage cliff’ which forces households into higher, variable mortgage payments as low-rate fixed loans expire, Crispin says.

“With each company we met over reporting season, we talked about the issues facing them and if they were seeing consequences from this mortgage cliff. So far, the consequences are very limited.”

Aussie equities: Why you should be scrutinising capital-intensive stocks

Equities investors have rightly kept a close eye on rising operating costs during the recent period of high inflation.

Now it’s time to pay greater attention to capital expenditure inflation, says Anthony Moran, an analyst with Pendal’s Aussie equities team.

“Any company with a fair bit of capital intensity will be exposed to price rises in coming periods,” argues Anthony.

“If you’re a capital-intensive company, capex inflation is going to erode returns, especially if you don’t have pricing power,” he explains.

“If you’re in an industry where there are just a few manufacturers and they all have the same cost base, maybe they can pass through the higher costs.

“But if it’s an industry like steel, which is a globally traded commodity, there is no pricing power.”

Elise McKay: Don’t be fooled into thinking AI has run its course

Sentiment has dipped on the US mega-tech stocks, but it would be a mistake to believe the AI theme has run its course.

That’s the view of Elise McKay, an analyst with Pendal’s Aussie equities team, who’s just returned from a US tour where she met with dozens of companies.

AI was a topic in almost every meeting, Elise says.

“AI is not a fad. Economic wobbles and geo-political uncertainty may have contributed to a recent sell-off in the Nasdaq.

“But there’s strong evidence that over the longer term generative AI will have a big impact across the business landscape.”

Today’s winners may not be the winners of the future though, Elise says.

For example, Nvidia is now an AI infrastructure winner because its chips are in high demand for resource-intensive AI training.

But there are signs market growth is shifting from training to “inferencing”, which requires less computing power.

Aussie equities: where to hunt for category winners in this economy

THE global economy has shown resilience in recent months – but there are now signs it is gradually slowing, along with consumption.

“We are moving from single-digit growth to single-digit declines,” says Pendal equities analyst Anthony Moran.

“In this environment investor mindsets change from being comfortable about resilient demand to thinking about downside risks.”

The shift has been particularly prevalent in industrials, which have underperformed other sectors, says Anthony.

“Investors don’t need to put all their money into hyper-defensives because things may not be that bad.

“Look for companies that are going to grow above their category, or are able to grow market share, particularly if they are trading at attractive valuations.”