The stocks and sectors where we see standout earnings growth in 2024

The global economy is in the early stages of normalisation as it heads into 2024. Despite the continued geopolitical risk, we believe the upward growth trajectory will continue, anticipating growth of 3.2% globally next year.

Within this context, we regard Australia as ideally positioned relative to other developed economies, forecasting 1.75% GDP growth in 2024. We have multiple reasons for this view, including:

• low unemployment,
• record household savings,
• strong terms of trade,
• structural commodity price support,
• and positive net migration.

Our reading of the economy is that with economic growth harder to come by in 2024, earnings growth will also be more difficult to find. But there are several areas where we expect to see growth.

The market is currently balanced on edge, between a negative view based on household spending that is being impacted by high inflation, higher rates, utilities and food costs; and a positive outlook that sees households adjusting because of a relatively resilient economy and a cushion of excess savings.

In cyclical sectors, some names still stand out, but overall, we remain cautious. We favour earnings growth from GDP-agnostic sectors and stocks, and quality leaders with demonstrated operational and pricing leverage.

Decarbonisation

Decarbonisation remains a key driver of Australia’s markets, with positive ramifications for the metals and mining, and energy sectors. Critical metals and commodities will benefit across the long rotation from fossil fuels to renewables in the great decarbonisation, and the electrification-of-things, driven by the building and upgrading of electricity transmission and storage infrastructure, with the steady switch from combustion and fossil fuel power to renewable electricity generation.

Banks and financial services

Banks are "leveraged plays" on the economy, and for that reason, they tend to track the path of economic growth. On a net basis, banks are now faced with higher funding costs with the normalisation of monetary policy, although there is likely a lessening of competition on rate offerings for the lending segment of the market. This should see reduced pressure on net interest margins throughout the year.

Furthermore, the better-than-planned balance sheet provisioning for bad and doubtful debts is expected to be benign as the unemployment rate remains stable at around current levels, and less than the 4.5% estimated by the RBA. 

While we see 2024 as a trough period for margins and volumes, and hence earnings, strong capital levels will continue to support sustainable dividend yields.

General insurers have performed well as interest rates have normalised, and we expect top-line growth to remain elevated through premium growth. Both these factors have been positive for the general insurance sector. When rates begin to fall, growth will be driven by premiums and claims inflation.

Technology

The ASX is now offering quite a unique range of tech names and opportunities, in online services, data centres, AI, data security and many other areas. The S&P/ASX 300 has around 33 technology names, across diverse areas of business.

Higher rates had punished the technology sector in general, but with rates now stabilising at a more normal setting, the outlook is improving again for technology companies, particularly those with pricing power, strong and defendable markets and globally addressable opportunities for expansion, and which are also already cash flow positive and profitable.

Australia has some impressive technology-driven firms operating across different sectors that are global leaders in what they do and have huge addressable marketplaces, such as:

• Block (ASX: SQ2), 
• Xero (ASX: XRO) , 
• Altium (ASX: ALU), 
• Carsales.com (ASX: CAR), 
• REA (ASX: REA), 
• Domain Group (ASX: DHG), 
• Webjet (ASX: WEB), 
• Life360 (ASX: 360), 
• Megaport (ASX: MP1), 
• WiseTech Global (ASX: WTC) and 
• NextDC (ASX: NXT).

We are expecting to see some rerating of quality information technology stocks, especially those that are earnings positive and have strong EPS growth outlooks.

Earnings

Earnings growth will be harder to find, but we still expect there to be pockets of growth. On aggregate, we see earnings growth for FY24 at a similar level to FY23.

There is room for some upward surprise in certain sectors as Australia’s economy remains relatively resilient and is operating near full employment.

On EPS growth, FY23 earnings growth was slightly down, which compared to FY21 (+30%) and FY22 (+21%) where earnings were driven by massive fiscal and monetary stimulus, represented a huge stall in earnings growth as the market adjusted to the normalisation of rates. If FY23 could be described as a ‘growth pause’ in earnings, we would suggest FY24 will be another flat year of earnings growth that can best be described as a ‘consolidation’ as balance sheets and P&Ls normalise for a future where interest rates are more normal, and only genuine growth in earnings matters.

In aggregate terms, the market is expecting negative earnings growth to June 30 financial year 2024. On balance, we see risks to the upside relative to consensus driven by better-than-forecast commodity prices, particularly for the bulks and energy.

Which sectors?

In the non-resource sectors, better earnings growth outcomes are likely in the health care, technology, telecommunications, commercial services, and to a lesser extent the banking sector.

Higher interest rates have hurt structured and highly leveraged businesses given rising funding costs. Sectors that had been impacted by the sustained higher rates included infrastructure, through the long-duration impact on cashflow income streams; and REITs, through rising cap rates, lower occupancy rates, higher funding and high levels of indebtedness relative to adjusted lower NTA.

While rising rates had punished technology names across 2022, the plateauing and normalisation of rates as well as cost-out programs saw them re-rating in 2023.

Ausbil sees technology as a potential earnings rerate in FY24. However, as most are long-duration growth assets, the impact will be variable. We expect pressures on valuation multiples overall, particularly for non-profitable tech stocks. We are selective, and favour tech with underlying sustainable cash flows with strong and growing earnings.

Value is also emerging in quality REITs, particularly those with exposure to data centres and housing, given population growth. Certain names within the infrastructure space are also offering value following the recent downward adjustment in prices.

The overall valuation of the Australian equity market is currently sitting close to long-term average multiples on a suppressed earnings outlook. Despite this, our conclusion on earnings growth opportunities heading into calendar 2024 is that the average never really tells the story on its own. Consensus currently expects earnings contraction in FY24 of -4.0% for the S&P/ASX 200, then a return to earnings growth of +4.7% in FY25.

However, we believe that earnings growth well above the system can be achieved in some sectors in FY24, and through key quality opportunities looking ahead.

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