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Monthly Report Australian Fund March 2022


The Forager Australian Shares Fund rose by 2.9% last month, trailing the 6.9% return of the All Ordinaries Accumulation Index. As was the case last month, the performance of the index was driven by resource companies, which rose by 10%.

After reporting earnings in February, few companies disclosed any meaningful news this month. There was no let-up in the flood of macroeconomic news though. The ramifications of the war in Ukraine continue to be felt. Inflation is rising in many parts of the economy. And interest rates are set to soar.

The macroeconomic situation has changed faster than many expected, and there are some serious threats to the spending power of Australian consumers. At the end of December the oil price was $75 per barrel. It is now $100 per barrel, leading average petrol prices to be well over $2 per litre and up more than 30% during the quarter. The availability and cost of labour alongside the increase in other commodity prices have also played a part in rising inflation, increasing the cost of living for Australians.

This being an election year, the government had some money to spend to relieve consumer pain. In the budget delivered last month the government halved the fuel excise for six months, increased the low-and-middle-income tax offset this year and handed out cash. This totalled $8.6 billion or about 0.6% of household disposable income. That tax offset is set to end this financial year though, despite the government initially thinking about another extension. This will sap about the same amount from consumer pockets starting in July.

But the other shoe is still to drop

Interest rate expectations have risen sharply over the last quarter such that by mid-2023, Australia could be seeing cash rates of 3% from the current historical low of near zero. This would see the standard variable rates of the cheapest major banks move to nearly 6% from 3% today. On the average $800,000 new mortgage in NSW, that would be an extra $16,000 of after-tax dollars to be funded from consumer pockets for the length of the loan. The banks have already adjusted the interest rate on fixed-rate mortgages for new borrowers, with Westpac hiking nine times in the last six months.

Add to that the consumer hunger for long-overdue holidays, and many companies exposed to consumption on large-ticket items and domestic goods could suffer. Lower house prices, dragged down by higher interest rates, are unlikely to make consumers feel good about spending up. Already, household spending estimates show furnishings and household equipment spending is down 5% on the prior year in January but remains 9% higher than pre-pandemic levels. The next big purchase is much more likely to be an overseas holiday than a new sofa.

Less than 5% of the Fund is invested in consumer-oriented businesses most affected by these pressures, with a further 3% invested in fintech lenders. In these companies we see stockspecific factors overcoming macro risks.
More of the Fund is invested in higher-growth technology stocks. And while they had taken a battering over the quarter, the month of March offered some reprieve for the likes of Whispir (WSP) and Nitro (NTO). The opportunity in smaller Australian technology stocks, relative to other parts of the market and relative to their large-cap brethren, remains.

Small-cap tech stocks are down twice as much as large-cap tech stocks since the zenith in the middle of last year, and trade at a fraction of the valuation for similar levels of growth. A basket of the largest and best-known Australian tech stocks is down 25% from the peak in 2021. The basket of less well-known, smaller tech stocks has more than halved.

With little to no profits for these groups, we can compare them on an enterprise value to revenue multiple. On that metric, the large-cap basket trades at 19 times revenue. The small-caps trade at just 3.4 times. Both groups are due to grow revenue 20% to 25%. Both have high-quality, sticky revenue.

And both are due to see revenue outgrow costs. So despite the tech malaise we have been seeing over the last nine months, large-cap tech business valuations have not really come down to earth. The valuations of smaller tech companies have come down with a hard thump.