MEDIA RELEASE: The two key issues heading into mid 2023 are the outlook for inflation, and hence interest rates, and uncertainty around corporate earnings, according to Maple-Brown Abbott.

Chief investment officer Garth Rossler said while inflation may have peaked, there is concern the market is ignoring the risk that inflation may remain at a higher level for longer.

“Our concerns are derived from two issues: the global issue that commodity prices will remain elevated for longer, driven partly by supply constrained by under-investment, and the local issue that wage inflation may still be rising.

“A further uncertainty is what happens to corporate earnings. Despite rumblings on the horizon, there has still been very few out-of-cycle earnings downgrades for domestic industrials. The latest quarterly earnings from the US have, if anything, confirmed that the impact of sharp interest rate increases and tightening of lending conditions are yet to materially show up in earnings reports,” he said.

Dougal Maple-Brown, head of Australian value equities, sees opportunities for investors in the energy and broader resources space over the medium term, albeit with the risk of shorter-term volatility.

“Commodity prices remain elevated and we see potential for this to last longer than expected, with supply constrained by underinvestment and ongoing geopolitical turmoil. In the energy space we continue to see value in Santos (STO) and Woodside (WDS), and favour Rio Tinto (RIO) in the materials sector.

“With the rapid rise in interest rates already observed, we see opportunities in companies that benefit from this shift such as insurers and banks. There are also a number of opportunities in out-of-favour companies with depressed earnings or multiples. At a market level, we see risks among the premium-rated growth and yield stocks where valuations have not yet fully adjusted to a higher interest rate environment.

“In our view, it is more likely we will have a stock picker’s market in which past excesses continue to be addressed, an environment that should suit our value investment approach.”

Emma Pringle, head of ESG, says that ESG integration, when done well, is critical to realising returns in value-aligned stocks. Value names can tend to be in ESG-challenged industries and so typically score poorly against traditional ESG ratings.

“We believe there is more upside to be had than the market has yet priced in. At the same time, given the nature of these industries, the ‘real world’ downside when companies get it wrong can be so much greater and why we place such a focus on stewardship.

“Energy and resource stocks, for example, are highly carbon-intensive and tend to score poorly on backward-looking ‘out of the box’ ESG ratings. However, to avoid holding them would mean missing the opportunity to be part of the energy transition – through both facilitating access to capital and then engaging to advocate for sustainable long-term outcomes for shareholders and ultimately supporting better outcomes for the world we live in,” she said.