For Yarra Capital Management portfolio manager Katie Hudson, the market’s surge back into the black for 2020 makes perfect sense considering the enormous and unprecedented amount of monetary and fiscal stimulus that has also been deployed.
The ASX’s strong recent run is, in part, being driven by the prospect that companies can grow profit much faster than revenue during the recovery.
Retail giant Harvey Norman provided a perfect example of the forces that have helped the ASX 200 back into the black on Wednesday.
The retailer’s trading update showed sales for the period between July and November 21 had surged 28.2 per cent. But even more impressively, profit before tax for the period from July to the end of October was up a staggering 160.1 per cent.
Clearly, there are some special circumstances at play for profit growth to outpace revenue growth so strongly. The fact Harvey Norman’s stores in Melbourne were prevented from opening until October 27 is a good example of costs were artificially held down while sales held up.
But investors should expect to see the phenomenon of profits rising faster than sales across the market in the next 12 months, as companies that have shrunk their cost bases during the downturn enjoy what Morgan Stanley’s global chief investment officer Michael Wilson described this week as “extraordinary operating leverage” during the reopening of economies.
“That’s a typical feature of the first year coming out of a recession,” Wilson says.
This prospect – that earnings will rebound even faster than the economy does – is one of the factors that has helped push the ASX 200 up 13 per cent since the start of the month to a nine-month high of 6696 points, just a point below where it started the year.
Yarra Capital Management portfolio manager Katie Hudson says that the market’s drive back into the black for 2020 makes perfect sense when you consider the enormous amount of monetary stimulus that central banks have injected into the economy and capital markets, and the unprecedented level of fiscal stimulus that has also been deployed.
“Those two factors are lighting a fire under equities,” Hudson says.
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