Insights

ESG (Environmental, Social and Governance), Socially Responsible Investing, Greenwashing and Corporate Responsibility are all becoming common terms and areas to consider for both Australian investors and Corporates.

Although the use of the term ESG has only occurred within the last 20 years, sustainability has been considered by investors as far back as the 1960’s with the use of socially responsible investing.

Socially Responsible Investing or ESG Investing involves socially conscious investors such as Not-For-Profits using ESG criteria to screen potential investments and assess whether they fit their values, mission or sustainability mandate.

With the announcement of new climate reporting requirements, the focus has shifted from Corporates voluntarily considering their ESG and sustainability positions, to now being faced with mandated reporting requirements, audited sustainability reports and potential director penalties for non-compliance.

Australian companies will need to be carefully considering their ESG strategy, climate related risks and plans, with stakeholders including investors placing more interest in companies that have a sustainable, climate aware businesses.

The recent 2023 ASX Investor Study found that 31% of investors are ESG conscious, with those investors focusing on companies that make a positive impact and avoiding companies that create social and environmental harm.  This view was more prevalent in younger generation investors (18 to 25 years) and those in wealth accumulation phase aged between 25 to 49 years.

Although the Environment or ‘E’ in ESG has been a high focus, it is now becoming common for companies to be closely considering their social impact and governance strategies as these have a wide impact across all stakeholders including investors, suppliers, customers and employees.

Morgans has a specialist Not-For-Profit and ESG team that can assist you on all your ESG and negative screening questions. Get in touch with your Morgans adviser to find out more.

The landscape of consumer discretionary stocks is ever evolving, shaped by economic indicators, company performances, and broader market trends. As we wrap up another year, it's crucial to revisit our projections and recommendations based on the latest data. Following the recent Annual General Meetings (AGM) season and shifts in foreign exchange (FX) rates, we've conducted a comprehensive review of our earnings estimates and target prices for companies within the consumer discretionary sector.

Updated Earnings Estimates

On a median basis, our Net Profit After Tax (NPAT) forecasts have been adjusted downwards by 1% for both FY24 and FY25. This adjustment primarily reflects our expectations for lower gross margins and increased operating costs across the board. Despite these reductions, our revised FY24 estimates stand 3% above the Visible Alpha consensus, indicating a slightly more optimistic view compared to the broader market expectations.

Strategic Recommendation Changes

The Reject Shop (ASX:TRS): We've upgraded our recommendation from Hold to Add. This decision reflects our reassessment of the company's growth prospects and its ability to navigate the current market dynamics.

Key Picks in Consumer Discretionary

Lovisa (ASX:LOV): Renowned for its fast-fashion jewelry offerings, Lovisa continues to exhibit robust growth potential, underpinned by aggressive international expansion and resilient consumer demand.

Super Retail Group (ASX:SUL): As a leading retailer catering to outdoor, sports, and auto enthusiasts, Super Retail Group has demonstrated commendable resilience and growth, making it one of our top picks in the sector.

Conclusion

As we navigate through fluctuating market conditions, our updated models reflect a cautious yet opportunistic stance on the consumer discretionary sector. The adjustments to our earnings forecasts and the strategic changes in our stock recommendations aim to capture the evolving landscape and identify opportunities for investors. Lovisa and Super Retail Group, with their distinct market positions and growth strategies, exemplify the potential for outperformance in this dynamic sector.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Contact your Morgans adviser to access the full research note or begin your journey with Morgans today to view the exclusive coverage.

Following the Federal Reserve's latest meeting, Morgan's Chief Economist, Michael Knox, provides an update on the Summary of Economic Projections, stating that rates will continue to fall until 2027.

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ESG stands for Environmental, Social and Governance; it refers to three main factors that investors consider with regard to an organisation’s ethical impact and sustainable practices. Socially conscious investors such as Not-For-Profits use ESG criteria to screen potential investments and assess whether they fit their values, mission or sustainability mandate.

According to the Responsible Investment Association Australasia (RIAA), 9 in 10 Australians expect their investments to be responsibly and ethically invested. This means investing funds in a way that does no harm, and ideally leaves the world in a better place.

Of particular interest to NFPs is the use of negative screening (also known as values-based or ethical screening). Negative screening is used to exclude companies from an investment portfolio on the basis of the industry in which they operate. This could involve screening for religious, ethical, moral and other social and environmental criteria (e.g. tobacco, gambling, weapons, animal testing). The other side is positive screening, where NFPs utilise ESG research to identify companies with superior ESG performance relative to industry peers.

In addition, incorporating ESG factors into an investment decision may even result in an outperformance effect.

It is important to be aware that particularly in the Australian context, there is a risk that imposing a large number of negative screens on a portfolio, can reduce the ability to diversify your portfolio. It may also deliver performance outcomes that differ from traditional market benchmarks.

Morgans has a specialist Not-For-Profit team that can assist you with all your ESG and negative screening questions. Get in touch with your Morgans adviser to find out more.

Examples of ESG issues

Environmental

• Climate change
• Waste and pollution
• Clean water and sanitation
• Affordable and clean energy

Social

• Supporting local communities
• Human rights
• Employee relations and diversity
• Quality Education

Governance

• Bribery and corruption
• Board diversity and structure
• Executive compensation
• Data security and customer privacy

Morgans Chief Economist Michael Knox's outlook for the world economy in 2024 is that growth will slow; inflation will fall; and money will flow into Stock Markets.

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In this analysis, we delve into recent developments in the telecommunications (telco) sector, focusing on NBN and mobile pricing trends, updates on significant events such as the 5G spectrum auction, and our adjusted forecasts. Additionally, we'll discuss our revised sector view and provide insights into specific companies within the industry.

Revised Sector View

Based on our comprehensive analysis, we have adjusted our sector view for the telecommunications industry. This assessment considers various factors, including market dynamics, regulatory changes, and company performance.

Telstra Group (ASX:TLS)

While Telstra Group (ASX:TLS) remains a key player in the telco sector, we maintain a Hold rating on the stock. This decision is influenced by the perceived risk/reward profile, which we believe is negatively weighted due to its premium valuation.

TPG Telecom (ASX:TPG)

Conversely, we have an Add rating on TPG Telecom (ASX:TPG). We see a more favorable risk/reward scenario for TPG Telecom, driven by its comparatively lower valuation within the sector.

Superloop (ASX:SLC)

Despite its status in the small-cap segment, Superloop (ASX:SLC) continues to exhibit promising potential. We maintain an Add rating on Superloop, considering it to offer the best value proposition within its category.

In conclusion, the telco sector is undergoing significant changes, influenced by pricing trends, regulatory developments, and technological advancements.

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