Rate hikes are back in view as Australian monthly inflation topped estimates. Inflation accelerated to its highest rate in six months in May, as annual headline CPI jumped to 4.0% from 3.6% in April, while trimmed mean inflation also accelerated to 4.4% from 4.1%. While the monthly CPI series is volatile, the figures reinforce the persistence of Australia’s inflation problem with headline inflation running at its fastest rate since November 2023.

The Focus Portfolio maintains zero exposure to the supermarkets as the sector’s near-term earnings outlook is clouded by cost-of-living pressures, easing food price inflation, and ongoing regulatory reviews being conducted by the ACCC. Longer-term, as mature businesses facing increasing competition within both food and non-food retailing, Woolworths and Coles have limited potential to deliver sustained, above-market earnings growth in our view.

With the outlook for iron ore demand clouded by structural headwinds within China’s property market, risks are skewed to the downside for iron ore prices in FY25. While the Focus Portfolio retains an underweight exposure to the commodity, Australia’s iron ore miners are some of the highest quality producers in the world and there are fundamental reasons to remain invested selectively within the sector.

The global monetary policy easing cycle is gradually kicking into gear with the Swiss central bank kicking off the global rate cut cycle with a rate cut in March, followed by the Swedish central bank in May. So far in June the Bank of Canada and the European Central Bank (ECB) have both added impetus to the global easing cycle by each cutting their policy rate by 25 basis points this month.

After 2 years of lacklustre performance at the index level, the ASX 300 healthcare sector is well placed to outperform over the medium-term given its positive earnings trajectory, which is considerably stronger than the broader market, as well as the sector’s highly attractive valuation at current levels. The Focus Portfolio remains overweight the healthcare sector with key positions being in ResMed (RMD), CSL (CSL), and Telix Pharmaceuticals (TLX), which are all explored in this report.

The past week has delivered disappointing economic news from the perspective of lower than expected consumer spending (monthly retail sales) and higher than expected inflation (monthly CPI). This mix places the Reserve Bank of Australia (RBA) in a difficult spot with an extended period of on hold policy looking increasingly likely.

After a number of ‘out of season’ annual/interim results in the last month, aggregate earnings expectations for the ASX 300 remain largely unchanged at the index level. However, beneath the surface there have been several positive updates at the stock specific level that have triggered meaningful consensus upgrades for select companies, including Focus Portfolio holdings Webjet (WEB), Aristocrat (ALL), and Xero (XRO).  These companies are the focus of this report.

Emerging market (EM) equities have been delivering improved relative performance in the last few months after disappointing through much of 2022 and 2023. EM valuations remain attractive versus Developed Market (DM) equities and the EM earnings growth outlook continues to look appealing.