Weekly Wrap 24 April

The following is a transcript of an interview with Will Riggall, CIO – Bell Financial Group, and Rob Crookston, Lead Strategist – Bell Potter. You can watch the original interview here.

Sophia Mavridis: Thank you for joining us this Friday, the 24th of April. I’m Sophia Mavridis and I’m joined today by Bell Financial Group’s Chief Investment Officer, Will Riggall. Will, thanks for joining us this Friday.

Will Riggall: Great to see you back again, Sophia. Hope you had a good break. Well deserved, absolutely. Good to be back here talking markets again.

Sophia Mavridis: It was. Well, we’re straight back into another big week. Developments in the US–Iran war kept coming this week; tensions are rising. I guess there’s been a lack of progress on peace talks and that’s impacting markets. There isn’t really a clear timeline. We’re seeing crude oil up to almost—I think it’s 97 US dollars per barrel—extending gains for the fourth consecutive session now, and no clear timeline for redemption talks. Energy prices are high, and gold is currently lower with inflation risks elevated. I might hand it over to you, Will—how are markets reacting this week?

Will Riggall: Yeah, I think they’re the main themes, Sophia. And look, I guess we do sound like a bit of a broken record. We go straight to the geopolitical component of markets. We need to step back a little bit and have a look at what’s happened over the last couple of weeks. We’ve been on an extraordinary tear, really—a rally from markets being down 10% or so, talking across all major markets.

The big question is: how on earth are we back to all-time highs in the US? We’re lagging a little bit in Australia, and that’s another topic to talk about. But we’ve gone from the expectations of further and ongoing price pressure to a genuine de-escalation. However, what the market is starting to get a little tired of is the lack of progress. We had the ceasefire timetable, which was supposed to end on the middle of the week, the 22nd. It’s been extended with no distinct timeline by Trump, but we’re really not seeing the progress we want on the ships moving through the Strait of Hormuz. So you’re right—crude and Brent as well, which Australia is probably way more exposed to, have just been creeping up during the week.

We are a little bit tired. We do have catalysts coming up; we’ve got the US reporting season starting in the next couple of weeks, which will be really important, and all expectations are that earnings will remain strong. Then we have this period now in Australia in a confession season of sorts. We’ve certainly started to see some of those downgrades come through in Australia, and I think that’s holding us back a little bit. We need a little more from our global leaders to help us go the next step. For us, it feels as though all incentives are in place to get to the point where those ships start moving again, but exhaustion is starting to set in a little bit.

Sophia Mavridis: So you mentioned, Will, US markets’ monthly performance is strong, but Australia is lagging behind. How are sectors impacting that? What is happening in sector movements and what are we seeing there?

Will Riggall: Yeah, it just comes down to the mix of each universe. If we think about the S&P, they’ve got those large global leaders that are exposed to AI trends—far less cyclical companies. If we step back and say: what does it all mean? How much is all this AI CapEx delivering for the world? It makes up about a percent of US GDP; that’s not insignificant and it’s not going away. We’re seeing that drive economic growth, but also earnings starting to flow through. We are seeing evidence of the benefits of AI through productivity.

The US is up 9.3% this month, and relatively flat this week. But compared to Australia, we’re up about 3.4% and down about 1.9% for the week. The dichotomy there is just the mix of companies we have on the ASX. We are far more cyclically exposed, and offshore it’s far more globally diversified companies with more exposure to that AI.

Sophia Mavridis: That’s right, and I guess Australia is more exposed to energy as well?

Will Riggall: Well, absolutely, and we’re starting to see that play through. If we talk about sectors—yes, tech was positive offshore. We are seeing a relative bounce in some of the higher-quality names. We don’t have a big tech sector here. But interestingly, energy has been positive again. It was a big drawdown from where we were when the oil price was high during de-escalation, but we have started to see some buying coming back into those names—Woodside, Santos, and Beach as well.

If we look at this upgrade/downgrade component and focus on Australia, we are still in an aggregate earnings upgrade cycle. We’re expecting reasonably strong growth above long-term averages, which supports the price-to-earnings multiple or valuation of our index where it is at this point in time. But we do need that growth to improve. We’re getting it on an aggregate basis just because of the size of the upgrades in Woodside and Santos, but if we look underneath, we start to see the number of names downgrading. Of course, that certainly had an impact on the banks this week, with our bank sector and financials underperforming.

Sophia Mavridis: Yeah. So banks were being downgraded, but a big news story this week was Cochlear. Can you tell us what happened with Cochlear this week, Will?

Will Riggall: Yeah, we probably shouldn’t smile about it because there are many shareholders out there. We’ve kind of gone through the process with CSL as well, seeing one of these great Australian leaders lose their way. On the CSL side, it was more a misallocation of capital—looking to fend off potential competitive concerns by going to a lower-quality business, diluting their bearing business. Obviously, if you put more capital to work and you’re not getting the earnings, you deserve a lower PE and you bring yourself some risk. That’s what played out.

On Cochlear’s side, what we had was a real shock for the market. Cochlear was looking to make about $460 million in underlying NPAT this year. That’s a huge number. Where they’ve ended up this week is saying they’re probably going to earn around $310 to $350 or $360 million. Most analysts have gone to the middle of the range, but to be honest, I feel that the risk may well be to the lower end.

The big problem is that Cochlear has the number one position globally—a great story for Australian technology—but their main end markets in the US have probably saturated a lot of the younger generation. Now they’re looking to grow into adults and seniors. Unfortunately, given the uncertainty and lower consumer confidence in the US, that segment of the population is seen as more discretionary. If Cochlear has gone from a structural growth story to a cyclical growth story, that’s the real problem. Not only are we seeing an earnings miss, but potentially it’s a more volatile, cyclical business. The downgrade today—a 40% decline—should not have happened for such a large company. You go to the large caps in Australia to offset that risk.

Sophia Mavridis: Thank you.

Will Riggall: But the problem is that we’ve got Middle East tensions impacting their emerging markets, regulatory change in China, and then that general lack of demand in the US and Europe. Dig Howitt, the CEO there, has got a lot of work to do. We have a changing environment. These companies all trade in reference to similar types of companies. When you’ve had CSL go from a 40-times to sub 15-times PE, it puts Cochlear on a reference multiple. When you actually look at the numbers, it needs to prove itself to perform from here. We probably won’t get that evidence until at least the August result.

Sophia Mavridis: What’s your advice for Cochlear shareholders right now?

Will Riggall: Look, without taking individual needs into consideration, but in a general nature: we had the 40% drop and then another 5% decline. My view is that it could bottom out a little lower than this, but this is a great company. Its intellectual property has significant value.

If you break it down, it has two parts to the business. It has the implants business which is ongoing—they need to keep rolling out new products like the Nucleus and the next developments—but then you’ve actually got this extraordinary high-quality annuity business, which is the services component. If you take a child who has medical deafness and they have a cochlear implant, they will have a lifetime of upgrades. That is an extremely high-quality business that will always be there. We just need a rebalancing of the growth.

It could get a little weaker, but the main damage has been done. I’d give the company the benefit of the doubt and look towards the August result to see if they can start to manage. They can’t manage the external environment, but they can manage their own organisation, manufacturing footprint, and costs to allow them time to grow again.

Sophia Mavridis: Yeah.

Will Riggall: Yes, just a great company seeing some headwinds. There is real intrinsic value in it, but we have yet to really understand exactly where it might play out. We should know more in the next three to four months.

Sophia Mavridis: Well, there was a lot to cover today. Thank you for your time. And for everyone joining at home, tune in next week. Will and I will be chatting markets again on Friday.

Will Riggall: Thanks so much, Sophia. Great to see you. Thanks all.

This information is general in nature and does not take into account your financial situation, objectives or needs. You should consider whether it is appropriate for you. You should read our Financial Services Guide and any relevant Product Disclosure Statements before making an investment. For more information visit belldirect.com.au or call 1300 786 199. Bell Direct is the trading name of Third Party Platform Pty Ltd ABN 74 121 227 905, AFSL 314341.