By Alex Gluyas
Listed company boards are becoming increasingly worried about government intervention in response to concerns that robust corporate profits are worsening inflationary pressures, according to Wilson Asset Management.
The investment manager said the issue was its biggest takeaway from the February reporting season, given the caution expressed by numerous boards about how, and when, policymakers might intervene.
It comes as data released by the Australian Bureau of Statistics on Monday showed that corporate profits rose by 10.6 per cent in the December quarter, almost four times the rate of the total wages bill which grew by 2.6 per cent over the three-month period.
“Throughout reporting season and speaking to various CEOs, we’ve seen the fear in management eyes of what politics may do to earnings, and it’s something we’re watching closely,” portfolio manager John Ayoub said in a results briefing for the WAM Leaders fund.
“Nothing is off limits, and it’s something we’re carefully evaluating when we construct the portfolio … It provides another level of sovereign risk which we never thought we’d have to worry about in Australia, and it’s certainly becoming more and more present.”
The fund is sticking with its bias towards quality, defensive stocks following the half-year results period, which supports evidence that the economy is beginning to slow as the Reserve Bank’s nine consecutive rate rises start to bite.
“There’s a fight to rein in operational expenditure because inflation has gone through the top line, and is now coming through the cost line, and in a moderating sales environment, margins are going to come under pressure,” said Matthew Haupt, lead portfolio manager of the WAM Leaders fund.
“That means the labour market will have to soften.”
The fund is continuing to avoid consumer-facing stocks as the demand outlook deteriorates.
“Things can’t get any better, they’re certainly going to get much worse,” Mr Ayoub said. “We’ve had a pull forward from COVID, consumer balance sheets continuing to shrink, and disposable income becoming thinner.”
While acknowledging there is significant pressure on the consumer, Mr Haupt said that Australia will avoid a recession.
That is in line with comments from Harvey Norman executive chairman Gerry Harvey who said on Tuesday that despite the pullback in spending, Australia is not headed for a hard landing.
On Wednesday, the economy is scheduled to report gross domestic product growth for the December quarter of 0.7 per cent, and the annual rate of GDP growth will slow from 5.9 per cent to 2.7 per cent.
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