News Analysis: IMF inflation warning; WiseTech CEO quits; Super funds face scrutiny

Welcome to the essential investor brief, featuring handpicked news for the week ending 25th October 2024.

This week's highlights include:

-Australia’s inflation woes persist: While the global battle against inflation has largely been won, Australia remains an outlier. Although the worst inflation spike is behind us, the IMF's downgraded growth projections and rising inflation expectations make it clear that much of the challenge is home-grown. The continued resilience of the government-funded job market is bad news for those expecting an interest rate cut anytime soon.

ECONOMY & FINANCE

Australia's inflation is expected to linger longer as the job market remains resilient, complicating the RBA’s policy decisions.

News highlights

The IMF projected that Australian tax revenue would reach a record 36.4% of GDP in 2024, but rising spending pressures are expected to widen the deficit to 2% of GDP in 2025. Australia could also face the second-highest inflation rate globally next year, complicating fiscal management.

• Takeaway: Australia's anticipated high inflation rate, coupled with a strong job market, may delay interest rate cuts, affecting asset valuations and introducing uncertainty into investment decisions.

Corporate insolvencies in Australia surged to record levels, rising 45.5% in Q3 2024. Construction and hospitality were hardest hit, driven by inflation, rising interest rates, and aggressive ATO tax recovery efforts.

• Takeaway: Rising corporate insolvencies in Australia indicate heightened economic risks, especially in vulnerable sectors like hospitality and construction. It may be wise to reassess portfolios and explore opportunities in distressed assets as the market stabilises.

For the second time in a month, Australia's superannuation sector has been labelled a risk to the financial system. After the RBA did the same, the IMF has raised concerns over the sector’s liquidity mismatch and the impact of illiquid assets on market stability amid rapid growth.

• Takeaway: Investors should be wary of the risks associated with Australia’s superannuation sector, particularly the movement into illiquid assets. This trend may trigger liquidity crises during market downturns, posing significant threats to overall market stability.

Hyperion Asset Management's Australian Growth Fund topped Mercer’s equities survey with a 42.2% return for the 12 months ending September 30, outpacing the S&P/ASX 300 Index. ECP Asset Management's All-Cap Fund and Platypus Australian Equities secured second and third places, with returns of 39.1% and 36.5%, respectively.

• Takeaway: The strong performance of Hyperion Asset Management’s Australian Growth Fund indicates the potential for high returns in growth-focused investments, particularly in technology and innovative companies. However, investors should remain vigilant about governance issues, as seen with WiseTech Global.

Office tower values may decline further, having already dropped over 20% in two years, according to Macquarie analysts. Only prime buildings are expected to appreciate, while discounts in listed landlords' stock prices suggest an additional 10-15% decline ahead.

• Takeaway: Amid ongoing challenges like high interest rates, weak tenant demand, and an oversupply of office space, the outlook for non-prime office towers remains bleak. In contrast, residential properties present a more favourable investment outlook, supported by tight supply-demand dynamics.

CORPORATE NEWS

Strong travel demand and Jetstar's success fuel Qantas' growth.

News highlights

Qantas is on track for revenue growth, targeting 10% capacity growth in FY2025 driven by stable travel demand and Jetstar's domestic success. However, international revenue may decline due to increased competition.

• Takeaway: Qantas is poised to achieve revenue growth with expected annual capacity growth. Share buybacks and potential dividends could boost shareholder value.

Richard White resigned as CEO of WiseTech Global following allegations of bullying and misconduct. The company's shares dropped below $100, wiping $8 billion from its value before rising again by as much as 22.1% after White took on the new role.

• Takeaway: Richard White's transition to "founding CEO" at WiseTech raises scepticism regarding accountability as his influence remains intact. While this may temporarily appease some stakeholders, it could complicate governance and potentially ignite further issues in the future.

David Di Pilla’s HMC Capital plans to expand into data centres, aiming to compete with AirTrunk. The firm has acquired Global Switch Australia for $2 billion and identified $4 billion in further investment opportunities.

• Takeaway: HMC Capital's strategic move into data centres highlights the significant growth potential in the digital infrastructure sector, amidst the booming demand for AI and cloud computing services.

Until next time...