Markets – March 2024

The ASX200 rose 0.8% in February, hitting its highest since August 2021. The recent rally in equities has been driven primarily by stronger US growth and a better-than-expected reporting season in Australia.

Technology stocks were the best-performing sector, benefiting from the global enthusiasm for AI adoption and a robust earnings growth profile. The highlight in this sector was a bid for ASX-listed Altium, acquired by a Japanese buyer paying 100 times earnings.

At these types of multiples, it is hard to see how the acquirer can derive a reasonable return on its purchase. It also highlights the AI/Tech share price bubble-like approach developing in this sector. Caution is needed in this corner of the market.
Global Share Markets
February 2024
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ASX 2000
Dow Jones
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Shanghai Composite
On the negative side, the materials sector fell by 4.8% and was weighed down by lower commodity prices.

It was a better-than-expected reporting season – ongoing inventory restocking supports further growth

The recent US and Australian reporting seasons have again highlighted that corporate earnings remain resilient, despite high interest rates and a cautious consumer.

Over the last couple of years, many companies have been running down their inventories. The fear of a hard economic landing/recession caused many companies to delay restocking, thus allowing their inventories to fall. However, there are tangible signs that the global post-COVID destocking is near completion.

Recent statistics have supported the view that these businesses are now comfortable restocking, considering retail sales are holding up reasonably well and are supported by ongoing high wage growth and low unemployment.

The benefit here is that an increase in inventories feeds through to higher levels of manufacturing, economic activity and corporate earnings.

Investors were rewarded with solid dividend increases

Another takeaway from the Australian reporting season is the higher level of dividends paid out of profits. Most sectors on the ASX increased dividends paid to shareholders compared to the previous year.

The good news on dividends was also felt in many Kauri Wealth Investment Portfolio stocks. To highlight several:

Kauri Wealth Portfolio Stock Increase
Perpetual Ltd 63%
Lendlease 32%
Car Group 21%
IDP Education 19%
ResMed 16%
Santos 14%
CSL 13%
Westpac 13%

The worst outcome for dividends was felt in the resources sector, with significant cuts across most mining stocks. BHP for example, cut its dividend by 20% compared to the same period last year.

Dividends for the current reporting season have commenced being paid and will continue until the end of April.

Alcoa makes an offer to acquire 100% of Alumina Ltd

In late February, US-based Alcoa Corporation made an opportunistic bid to acquire 100% of the shares in ASX-listed Alumina Ltd for A$3.3B.

Alumina and Alcoa are joint venture partners in a global portfolio of bauxite mines, alumina refineries, and aluminium smelters, including the Portland smelter in southwest Victoria, which is run by the giant American partner. Alcoa owns 60% of the joint venture, with Alumina owning 40%.

Alcoa announced in January it would shut the Kwinana alumina refinery south of Perth this year, with the loss of about 800 jobs. The company is also considering closing its San Ciprian operation in Spain. Both of these operations have been making losses over the last couple of years.

Alcoa’s timing is opportunistic, given that the Kwinana and Spanish operations closures are expected to return the joint venture to profitability. The offer by Alcoa highlights the quality of the assets and strengthens Alcoa’s position as one of the world’s largest bauxite and alumina producers.

It also allows Alumina Limited shareholders the opportunity to participate in a stronger, better-capitalised and combined company with long-term upside potential.

Alcoa expects the transaction to be finalised between July and September, if it gains approval from both companies’ shareholders and Australia’s Foreign Investment Review Board, as well as antitrust regulators in Australia and Brazil.

Sources:  ASX, The Australian, Bloomberg, CBA, Morningstar, Blackmore Capital, Westpac, Firetrail, Schroders & Pendal.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963

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