[00:00:37] The ASX has had another strong quarter up 5%. What are your key takeaways from the February reporting season?
The ASX has shown remarkable resilience over the past quarter, reflecting a positive shift in market sentiment compared to a year ago. With the recent reporting season, there’s evidence contradicting the doomsday scenarios previously priced into the market. Companies have demonstrated stronger-than-expected earnings, buoyed by maintained prices, stable volumes, and even raw material price deflation, leading to improved gross margins. Sectors like consumer discretionary, once feared due to economic cycle concerns, have seen surprising performance, as seen by Premier Investments and Nick Scarli’s significant stock price increases.
Another observation is the moderation in price dynamics, with companies returning to more typical cadences of price increases, averaging around 2 – 3%. While this may not necessarily translate directly to CPI data, it signifies a cooling of price pressures within the market. As investors navigate these shifts, there’s a return to focusing on fundamental analysis, marking a departure from narrative-driven investing. Opportunities still exist, although in a more normalised environment, emphasising bottom-up selection of undervalued quality stocks rather than sector-specific trends.
[00:05:00] What new opportunities are you considering?
IDP Education, a recent addition to the fund, operates in two key areas: English language testing and student placements for international students. As one of only two distributors worldwide for the IELTS test, they hold a significant position in the market. Their expertise in guiding students through the complex process of applying to universities abroad, without charging them directly but rather being compensated by the universities, shows their advantageous business model. With deep-rooted relationships with 600 universities and a 45-year history, IDP Education is a solid foundation in the industry.
The current opportunity arises from the political and regulatory challenges surrounding immigration in countries like the US, UK, Canada, and Australia, which have led to a significant drop in IDP Education’s stock price and valuation multiples. Despite these short-term headwinds, the fundamental strength of the business, marked by consistently high returns and significant EBIT growth over the last decade, suggests a compelling long-term investment opportunity. As immigration policies potentially shift back in favour of facilitating international student flows, IDP Education is well positioned for a re-rating, making its current valuation particularly attractive for investors seeking quality growth opportunities.
[00:08:51] Can you provide some insight on the healthcare sector and how you assess the sector?
ResMed has experienced a divergence between sentiment-driven headwinds and robust earnings performance, particularly in light of its main competitor, Philips, facing FDA constraints. Despite concerns surrounding ResMed’s addressable market due to regulatory shifts, recent market rationalisation has led to a positive revaluation of the stock, marking a significant uptick in its share price. This shows the importance of distinguishing between market sentiment and fundamental business performance when evaluating investment opportunities.
When assessing investments within the healthcare sector, two critical factors emerge: the capital intensity of the business and who bears the financial burden. While some healthcare segments, such as private hospitals and diagnostic imaging, face significant capital demands and reliance on government funding, others, like ResMed and Cochlear, benefit from consumer payments or address niche markets with limited government involvement. This means understanding these dynamics is crucial for navigating the healthcare sector’s diverse landscape and achieving optimal investment outcomes over time.
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