Aussie CPI, two equity ideas, and more

28 September 2023

Aus

The Australian market (ASX200, -0.1%) edged lower with most sectors trading in the red.

The main news driver was Australia’s monthly inflation data, which told a similar story to the US for the month of August.

The monthly Consumer Price Index (CPI) indicator in Australia climbed by +5.2% over the year to August 2023, accelerating from a 4.9% gain in July, which was the lowest level in 17 months, matching forecasts. It was the first increase in annual inflation since April, due mainly to faster rises in oil prices, as well as transportation – as providers pass on the the cost.

The data increased bets on another interest rate hike by the RBA later this year – reiterating that the interest rates need to remain higher story from last year. Even though inflation is down from its peak more work is required to reach the RBA’s 2-3% target range.

Australia Monthly CPI

Bond rates across the globe continue to rise as the US 10-year Treasury yield hit its highest level in 16 years. Not helping the fight against inflation is oil rising another +3% with Brent crude oil breaking $97/barrel.  We see inflation as remaining stubbornly elevated over the near-term — largely oil price driven. The higher interest rate environment and elevated inflation means we view a soft landing as a very unlikely outcome and we prefer to hold a defensive mix of equities and cash.


Two equity ideas: “down and dirty in the charts”

Both Dollar General and Diageo are trading at a discount to their historic P/E ratios, as detailed below. Dollar General has sold off as the US consumer’s spending power has weakened (no surprises there). Dollar General is a best-in-class performer in a big but niche industry — rural towns that are not serviced by “big box” players. It’s deeply unloved by the market at the moment after being a COVID darling; we like buying the fear — it worked well for us when buying DGL and Duratec. If you expect margins for DG to normalise after a rough quarter, then it follows that the stock should experience multiple expansion. The question we ask is: will people still be buying essentials and groceries during and post recession? And the answer, we posit, is a resounding yes. DG – historic P/E multiple

Diageo owns Johnny Walker, Guinness, Baileys, etc. It is a key player in the premium spirits market. We like the long term thematics for spirits — more people are drinking spirits and less people are drinking beer as drinkers seek healthier options (classic piece here – “drinking less, drinking better”). As expected, Diageo has a lot of pricing power — it commands operating margins of 28% and a ROIC of 18%. It has sold off this year given a weak UK market and more fund managers excluding alcohol stocks from their portfolios due to ESG concerns. We think it is likely that people keep drinking, and we like buying a good company at a discount to its historic earnings multiple.


Recent articles we enjoyed

Bloomberg – Private Equity’s Slow Carnage Unleashes a

Wave of Zombies. Link.

FT – Why Linda Yaccarino took on the wildest job in Silicon Valley. Link.

NY’r – Inside Sam Bankman-Fried’s Family Bubble. Link.

FT – Dyson and the divide over working from home. Link.

Do You Want Daily Market Insights?

If you’re interested in staying up-to-date with the latest news and analysis on stocks, be sure to sign up to BlackBull Research.

1 Month Free Trial

Access our expert stock market research Free of charge with no obligation

Free 1 Month Free Trial

Unlock this article & access our expert stock market research

ASX, NZX & USD Stock Buy, Hold, Sell recommendations. Model Portfolios. Daily news and more

[pmpro_checkout]