Outlook Snapshot

Cyan Investment Management

September 2022

After the strong rally in July which extended into the middle of August, markets became significantly more bearish on renewed inflation concerns and rate rises which saw the broader markets shed almost 5% in the last two weeks of the month. Much of this bearishness was as a result of rate rise fears being validated in early September with the RBA's fifth rate rise in as many months taking rates from 0.35% to 2.25%.

By and large the August reporting season did not produce the dire results many participants feared, although, in the case of many companies, outlook statements from management were noncommittal due to the economic and geopolitical uncertainty ahead. Another key theme was a focus on cost management, and there remain a number of high-growth emerging technology businesses that failed in that regard and continue to burn through extreme amounts of cash.

Anecdotally we have seen an increase in market activity, a number of new IPO's have been marketed along with a good increase in corporate flow along with the previously discussed takeover activity. Whilst this has not yet resulted in substantially increased trading volumes, we absolutely feel that the market is heading back towards more 'normal' levels of activity.

Outlook
 
There's no doubt we're finding it tricky to predict price movements in the short-term. Stocks that otherwise produced results well ahead of expectations have not moved (BRI, SLH, QHL) yet others have swung wildly in both directions on account of reduced market volumes.

As we mentioned in our introduction there are certainly some 'green shoots' in the domestic market with takeover bids, new IPOs and generally increased levels of confidence and market activity. In the past two weeks we have had more than a dozen face-to-face meetings with management (along with a similar number of zoom calls) so it's very much beginning to feel like business conditions are improving.

After more than 12 months of bearish stock market trading we feel there are presently a number of emerging market trends that could result in markedly improved short to medium term performance.  
•    Continued takeover activity in the domestic market
•    Further appreciation of underlying company performance
•    Increased market liquidity
•    Renewed opportunities through IPO and other corporate activity

Certainly, we feel that our investee companies have been, on the whole, trading well and we're firmly of the view that from present levels, upside price appreciation far exceeds downside.

What we wrote previously remains very much relevant:

"We still see a gap between price and value in many of our holdings. However, with sentiment feeling more positive ... we hope that some of that inherent value will be released in the short to medium term as the market re-focuses on quality, growing companies and fundamental research." 

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