Look beyond banks and ore miners as rates fall, says Maple-Brown Abbott

Stocks are soaring as rate cuts loom but value is far from universal. That’s why the nation’s oldest value fund has cast its gaze beyond the big banks and iron ore miners.

Maple-Brown Abbott did well from being overweight on the banks in mid 2023 when most were bearish. Picture: Britta Campion

Australian stocks are soaring as the first interest rate cut looms but value is far from universal as the market nears record highs.

The nation’s oldest value fund, Maple-Brown Abbott says it’s time to look beyond the big banks and iron ore miners.

The ASX 200 hit a record high of 8515.7 points on Thursday as the market-implied likelihood of interest rate cuts beginning in February rose to an almost certainty after December quarter inflation data undershot the Reserve Bank’s forecast.

Dougal Maple-Brown, who heads Australian value equities at Maple-Brown Abbott says that in terms of attractive areas for value investors the “list is pretty short”.

There are plenty of sectors he doesn’t like, including tech, banks and most of healthcare.

Industrials ex-financials screen as expensive in his view despite pockets of value in defensive areas.

Maple-Brown’s fund is also underweight iron ore miners, in light of what he sees as unsustainable steel output from China – particularly in the context of the potential for tariffs being applied to Chinese steel shipped to the US via Mexico – and the prospect of supply increases from African mines.

“The outlook for a weak Chinese economy and more supply didn’t look so healthy for the iron ore price, which has kept us underweight,” he said.

Analyst Dougal Maple-Brown of Maple-Brown Abbott.

“We’re not quite there yet, but there will come a point, partly because the rest of the markets are so expensive, that we might well be back into iron ore.”

Perhaps the scarcity of value says something about the extent to which interest rate cuts have already been priced in by the broader market. However, there are a few areas that he sees as “attractive”.

The energy sector was the worst performing sector in 2024, returning around minus 15 per cent while the ASX 200 index returned 11.5 per cent on a total return basis. Energy also lagged in 2023.

But energy valuations are now “reasonable” according to Maple-Brown, particularly versus steep valuations for most industrials. The energy sector will benefit from a 10 per cent fall in the Australian dollar over the December quarter. Most have US dollar revenues and Australian dollar costs.

Office exposures within the property sector are also coming on to his radar.

Sell-side reports this month have highlighted interest rate cuts as a catalyst for outperformance in the property sector via lower funding costs, capitalisation rate stability and a potential rerating.

They have also tipped a broadening of property sector performance beyond Goodman Group which surged 87 per cent over the past two years thanks to the AI boom and its exposure to data centres.

Analysts at both Citi and JPMorgan both foresaw an “inflection point” for the sector. JPMorgan said that offices should “finally show improvement”, particularly in Sydney as employees return to the office.

Maple-Brown is also sees value in the consumer staples sector but cautions that the outlook is uncertain amid multiple regulatory inquiries into supermarkets and a federal election looming.

“I don’t think you want 10 per cent of your portfolio in the sector – you just don’t know what might happen,” he said.

His fund did well from being overweight on the banks in mid 2023 when most were bearish. This was during a mortgage war among banks and expectations of a “mortgage cliff” and “hard landing” in the Australian economy after the Reserve Bank increased interest rates to clamp down on inflation.

“We were overweight the banks and it was a big contrarian call purely on valuations,” he said.

At that time his fund bought ANZ and Westpac at roughly book value and 10 times forward earnings.

By the end of 2024, ANZ shares had soared almost 60 per cent and Westpac was up 80 per cent.

However, there’s been virtually no improvement in the earnings outlook since mid 2022.

Westpac, for example, now trades on about 16 times earnings and 1.5 times book value.

Most long-only funds have been underweight on the banks for the past two years.

Some were forced to buy because their mandates don’t allow them to be too underweight.

A sharp fall in China’s stock market through 2022 and 2023 may have led regional investors to increase their stakes in Australian banks as they sought alternatives to some Chinese stocks.

Super funds increased their holding to 29 per cent while retail investors turned into sellers.

But while he was “too early” cutting banks to underweight in the portfolio in mid-2024, Maple Brown now said the best-case scenario for banks was that they track sideways for some years.

“That would be the best case – I think that’s even that’s optimistic, because we’ve got no earnings growth in our bank earnings forecasts,” he said.

“Credit growth is low single digits, net interest margins have been compressed dramatically.

“You might get 1-2 per cent revenue growth, but costs will grow at 2-3 per cent and everybody, rightly so, has the bad debt cycle increasing, given it’s basically nothing.”

He said CBA’s mortgage arrears would be “closely scrutinised” when it reports next month.

Originally published as Look beyond banks and ore miners as rates fall, says Maple-Brown Abbott