My recent trip underlined the nation's growth potential, with a vibrant economy, increasing investments and the promise of fresh overseas capital into its bond market.

The burgeoning potential of India's vibrant economy is palpable from the moment you set foot in the country, with its young workforce noticeable as soon as you land.

On my latest visit to the country in September, what became immediately apparent was infrastructure improvements to ease congestion - an encouraging sign of government progress.

Construction to develop other transport links are also in the pipeline, including Mumbai Metro Line 3 connecting Cuffe Parade to Aarey district and a bullet train from Mumbai to Ahmedabad.

The bullet train will cut travelling time between Mumbai and Ahmedabad to just two hours. It underlines India's growth potential.

At an estimated cost of $13.6 billion and completion date of 2027, the bullet train will cut travelling time between the cities to just two hours, from over six hours previously. It underlines India's growth potential.

Site of main bullet train terminal (highlighted in red) and the metro (highlighted in orange) in Mumbai.

But while congestion has improved, it's from a low base. India has ground to cover to drive efficiency and keep its GDP growth outlook on track, which most economists estimate at 6-6.5% per year.

But the government is in action mode, with INR3.7 trillion ($45 billion) in public spending for the first five months of the current financial year already INR2.52 trillion higher than the same period last year.

Feedback on the ground

My discussions with companies on the ground underlined the resilience of both the domestic jobs market and India's broader economy. Company leaders aren't anticipating any imminent reduction in interest rates, with the Reserve Bank of India (RBI) having held steady at 6.5% since February and retained a tight stance on liquidity to shift inflation of 6.8% down towards its 4% target.

With recent data showing investment up 8% year-on-year in the second quarter, we see room for a pick-up in private investment, with companies' capital spending still allocated to sectors with the highest growth potential. This places less demand on the government to drive growth, allowing it to focus on fiscal consolidation and, in turn, lowering its funding requirements from the bond market.

Mumbai is awash with infrastructure projects.

Renewable energy is one area where we see an increase in investment. Sprawling conglomerate Reliance Industries - best known for its oil refinery business - has pledged to deploy capital into new energy over the long term to develop this segment of its business.

Reliance is also investing heavily in the rollout of 5G over the next 12 months to tap into India's high adoption of smart phones. A recent survey by Ericsson estimated that 31 million users were likely to upgrade to 5G phones by the end of this year.

Separately, fellow conglomerate Tata group - one of the country's largest employers - is looking for new office space to meet growing demand for its IT consultancy services.

Indeed, the nation's services exports are holding up despite the global slowdown in demand for goods. India's services balance for the second quarter of 2023 was over $4 billion higher year-on-year and has been useful to offset weakness in goods exports.

Most businesses welcome RBI's efforts to suppress foreign exchange volatility since it allows them to plan and hedge with greater certainty, although the small pick-up from rupee deposits currently on offer at around 6.5% isn't attractive enough to encourage immediate repatriation of export earnings when US dollar equivalents are above 5%.

While exporters must convert these to local currency within 90 days, most are in no hurry until they see higher local deposit rates from here, which would slow RBI's pace of FX accumulation.

Importantly, the recent decision to include Indian government bonds (IGBs) in the JP Morgan GBI Emerging Markets Global Diversified Index from June next year is a hot topic after much speculation over recent years. Now the onus is on other index providers to do the same.

Both onshore and offshore stakeholders in India welcome this development since it promises to expand the bond market's investor base, adding a positive tilt to the demand-supply dynamics for Indian fixed income.

Initially, the index provider estimated that inclusion would result in $25 billion in inflows (10% of the $250 billion tracking the index), although we anticipate higher flows since a third of the $250 billion comes from customised indices that exclude China in the investible universe. This points to a sizeable pool of active managers more likely to have overweight positions in India.

While there are fears about the potential for large foreign outflows in a risk-off environment, ultimately expected inflows would still be less than 5% of the RBI's $600 billion war chest of FX reserves.

Adding to this favourable backdrop, a recent rule change to allow banks to hold more high-quality bonds in their hold-to-maturity portfolios should provide another source of support for government debt. Together with index inclusion, it creates a positive demand picture for Indian bonds.

Reasons to be bullish

Domestic investors are known for a bullish outlook on India. But the reasons are starting to stack up given favourable demographics, its status as a global IT services hub and the fact it is a beneficiary of the China+1 strategy where companies seeking to diversify are looking to invest in India. Central bank action means rupee volatility is also among the lowest of all Asian currencies.

Few investors that I spoke to are talking about the tail-risk scenario raised by JP Morgan chairman Jamie Dimon recently that US interest rates could hit 7%, which would likely have a major impact on emerging markets, including India.

Perhaps that's because there's an expectation that income growth in a vibrant population of 1.4 billion people could counterbalance any external global shocks. If improvements in infrastructure are anything to go by, India may finally be living up to its much-vaunted promise.

Author: Soh Wai-Kiat, Investment Manager, Fixed Income Asia

"Although we forecast that major DM central banks (aside from Japan) are finished hiking, our baseline forecast implies little incentive for them to cut interest rates in the near term," Goldman Sachs foreshadows, with Raymond James charting the cooling of core US inflation to levels still higher than seen for many years. Our favourite chart this month has Apollo showing that the market is almost always wrong about what the Fed will do next. Apollo backs up with a graphic on "weak demand". SMBC NIkko gives us a view on the relationship between inflation and valuation. Tech stocks are at record highs relative to the broader market as Bank of America charts, while Goldman shows the impact on market valuations. Equitable Investors looks at movement in the EV/EBITDA multiple on tech stocks relative to bond yields. We get another take on the surge in index concentration from Bespoke - and small v large via Bank of America. Deutsche Bank reckons AI didn't drive markets. Finally we get stuck into VC, where Crunchbase data shows significantly less unicorns being born and funding remaining subdued, with the Refinitiv Venture Capital Index remaining well of its highs despite recent gains.

Goldman Sachs' policy rate forecasts for developed markets

Source: Goldman Sachs

Core US CPI

Source: Raymond James

The market is almost always wrong about what the Fed will do

Source: Apollo

Mentions of "weak demand" during S&P 500 earnings calls

Source: Apollo

Earnings multiples mapped against inflation

Source: SMBC NIkko via Bloomberg

Tech sector at all-time high vs S&P 500

Source: Bank of America

Price-to-Earnings multiples by market - tech sector elevates US multiples

Source: Goldman Sachs

US 10 year bond yield (top) mapped against US tech sector (QQQ ETF - bottom)

Source: Koyfin, Equitable Investors

S&P 500 stocks from smallest to largest - 10 years ago v today

Source: Bespoke

US small caps histoically cheap vs large caps (Forward PE of Russell 2000 v Russell 1000)

Source: Bank of America

Difference between abnormal returns for semiconductor and software firms, 20 day moving average

Source: Deutsche Bank

Emerging unicorns by the year founded

Source: Crunchbase

Global venture funding (US dollar volume)

Source: Crunchbase

Refinitiv Venture Capital Index

Source: Financial Times

The Taskforce on Nature-related Financial Disclosures (TNFD) is an international initiative that is developing a framework for companies and financial institutions to disclose their nature-related risks and opportunities. Climate and net-zero commitments are well understood, with corporations relying on the Taskforce for Climate-related Financial Disclosures that released a set of recommendations in 2017.

The idea of TNFD is not entirely new. It has built upon the foundational success of the Task Force on Climate-Related Financial Disclosures (TCFD), which focuses on the financial implications of climate change for companies. However, as the global dialogue evolved, it became clear that climate was only a part of the broader environmental narrative. Biodiversity loss, land degradation, and ecosystem collapse pose significant risks to economies and businesses around the globe. The TNFD first came into existence in June 2021 to address this gap and ensure a holistic environmental approach in corporate disclosures.

Biodiversity is the diversity of all living organisms and is the living component of nature capital. Net zero and nature are intrinsically linked, and both need to be addressed to build a better and more sustainable future. A simple example of this is that forests, which cover about 31% of the earth, absorbed 7.6 gigatonnes of CO2 p.a. over the period of 2001-2019 according to a 2021 study in the journal Nature Climate Change. Preserving - and perhaps increasing - forests are key to preserving biodiversity, helping to lower ambient temperatures of regions and sequester CO2.

Importance of a nature-positive economy

A 'nature-positive economy' is essential for a sustainable future and is a key concept that drives the TNFD framework. A nature-positive economy is an economy that has a net positive impact on nature, an economy that restores and regenerates nature rather than depleting it. Nature provides us with essential ecosystem services, such as clean air and water, food, and climate regulation. Without a healthy natural environment, our economy and society cannot thrive.

There are several things that can be done to create a nature-positive economy. One important step is to reduce our impact on nature. This can be done by reducing our consumption of natural resources, reducing pollution, and protecting and restoring ecosystems. Investing in nature-based solutions will be an important step forward. Nature-based solutions are ways to address climate change and other environmental challenges using nature. For example, forests can be used to absorb carbon dioxide from the atmosphere, and wetlands can be used to filter water and reduce flooding.

The transition to a nature-positive economy is essential for a sustainable future. However, it is a transition that will require a concerted effort from all stakeholders, including governments, businesses, and individuals.

The sectors that have the most impact on biodiversity are the logical companies that will be the early adopters of the TNFD recommendations. These sectors include materials, energy, agriculture and food & beverage. 

A framework for nature-based solutions

The TNFD's final framework was published in mid-September 2023. It includes 14 recommended disclosures covering nature-related issues, impacts, risks and opportunities that are structured around four pillars (refer Figure 1).

Figure 1: TNFD's recommended disclosures

Source: TNFD, Sept 2023.

It is hoped that the TNFD provides a clear, structured framework that help corporates understand the implications of biodiversity and natural capital for their activities. The framework is intended to assist corporates and financial institutions manage their nature-related risks and opportunities, and to support the transition to a nature-positive economy. While it is largely based on the TCFD framework, it also considers the specific risks and opportunities associated with nature.

The TNFD framework covers four specific areas:

• Nature-related dependencies: This includes the extent to which a company or financial institution relies on nature, such as for its raw materials, water, or pollination services.
• Nature-related impacts: This includes the positive and negative impacts that a company or financial institution has on nature, such as through its operations, supply chain, or investments.
• Nature-related risks: This includes the risks that a company or financial institution faces from nature, such as from climate change, biodiversity loss, or water scarcity.
• Nature-related opportunities: This includes the opportunities that a company or financial institution can seize from nature, such as by investing in sustainable agriculture or renewable energy.

The TNFD framework is expected to be a valuable tool for companies and financial institutions to manage nature-related risks and opportunities. It will also help to promote the transition to a nature-positive economy.

Some of the benefits of the TNFD framework include:

• Helping companies and financial institutions to identify and manage their nature-related risks and opportunities.
• Improving the transparency of nature-related risks and opportunities.
• Driving investment in nature-positive activities.
• Aligning financial markets with the targets of the Paris Agreement and the UN Sustainable Development Goals.

Global progress

Although the TNFD framework has only recently been settled; governments and intergovernmental organisations have increasingly called attention to the impact on nature. Pleasingly, a rising number of businesses have made pledges relating to biodiversity.
Companies globally are only in the early stages of setting a broad set of nature-related goals whereas most have set climate-related targets (refer Fig 2). The EU set a biodiversity strategy in 2020 that aims to complete 100 target actions by 2030. Some of these targets include restoring degraded and carbon rich ecosystems, converting at least 30% of its land and ocean area into legally protected areas and encouraging at least EUR20bn p.a. in bio-diversity-related financing. Despite this, S&P claims that only 29.5% of the largest companies in the S&P Europe 350 Index have set biodiversity targets

Figure 2: Corporate targets are less common for other dimensions of nature compares to climate change

Source: McKinsey

McKinsey has calculated that ~47% of Fortune Global 500 companies have set nature-related targets against one dimension of nature - generally this is against climate (refer Figure 2). Approximately 16% have set targets against three or more dimensions of nature and no companies have targets against all six dimensions that were looked at in this analysis. The Science-Based Targets for Nature (SBTN) initiative suggests that companies are more likely to focus on the key issues that directly impact their activities which could explain why no company has set targets against all six dimensions.  Cutting the data based on a sector level reveals that the sectors that have a higher exposure to biodiversity risk are leading the charge on target setting.

Figure 3: Fortune Global 500 Companies' nature-related targets by sector

Source: McKinsey

Implementation of TNFD

Implementing TNFD is not without its challenges. In particular, there's a need for:

• Data Collection: Many companies lack the data or the means to gather it to understand their complete environmental impact;
• Standardization: With no globally recognized metrics to measure nature-related risks, creating a standardized framework will be demanding;
• Economic Pressures: Short-term profit goals can overshadow long-term sustainability targets, making it challenging for some companies to prioritize nature-related disclosures; and
• Stakeholder Alignment: All stakeholders, from suppliers and employees to regulators and consumers, need to align for effective disclosure and action.

The framework is consistent with the recommended standards of the TCFD, ISSB (International Sustainability Standards Board) and GRI (Global Reporting Initiative). The recommendations have an intention to provide a practical solution for corporates to start their journey to increase the scope and disclosures over the coming years. The expectation is that, as with climate-related reporting, TNFD disclosures will improve over time.

The LEAP approach - Locate, Evaluate, Assess and Prepare - has been developed by the TNFD to help organisations to identify, assess and manage nature-related risks and opportunities. While the approach is not a requirement, it is designed to help with identification and assessment. Figure 4 provides an overview of LEAP and its elements, which covers:

• Locate: Identify the organization's interface with nature, including its direct operations, supply chains, and value chains.
• Evaluate: Evaluate the organization's dependencies and impacts on nature.
• Assess: Assess the nature-related risks and opportunities facing the organization.
• Prepare: Prepare to respond to (and report on) nature-related risks and opportunities.

Figure 4: The TNFD approach for identification and assessment of nature-related

Source: TNFD, Sept 2023

Conclusion

While the challenges are significant, the TNFD offers a critical pathway for integrating nature into financial decision-making and improving outcomes for our environment. The success of the TCFD suggests that with global cooperation and commitment, the TNFD can become an influential tool in driving sustainable business practices. Governments, financial institutions, environmental organizations, and businesses all have important roles to play.

By implementing frameworks such as the TNFD, the global community takes a step closer to ensuring that the economic activities of today do not compromise the planet's well-being tomorrow. The shift from merely profit-driven strategies to those that also account for nature-related impacts signifies an evolution in global business practices. It is an evolution that is not just commendable but essential for the longevity and prosperity of both businesses and the planet.

Tyndall will be increasingly engaging with corporates around biodiversity and promoting the implementation of the TNFD framework, as we have been with TCFD. According to work by Jarden, only 12 (24%) of ASX50 companies have nature-related targets. It was noted that BHP, Woolworths, South 32 and Origin Energy had undertaken TNFD pilots, and only Brambles and South 32 have linked nature to remuneration. 

Clearly, there is plenty of improvement required. We expect that those companies in sectors more exposed to nature-related risks such as agriculture, food and beverage, and mining, are likely to lead the charge. 

Author: Brad Potter, Head of Australian Equities

The Future Quality approach to navigating uncertainty

The great quantitative easing experiment of the last decade set global markets on a course into unknown territory. The repercussions of this are only just starting to play out and are proving near-impossible to predict. Central banks contended a rise in inflation would be temporary until it proved to be persistent and sticky. At the start of this year, markets were collectively expecting the US Federal Reserve to start tapering monetary policy, but we cannot yet be certain that interest rate rises have peaked. Earlier in the year, America's banking sector was unexpectedly impaired by the impact of rapid monetary tightening, but could other sectors also be vulnerable to unforeseen shocks? And we are yet to truly see the impact that central bank actions will have on growth. The major economies have so far avoided falling into recession, but for how long?

Market dynamics reflect this sense of uncertainty. US equity returns have largely been driven by a cohort of seven mega-cap stocks during the first half of the year, a narrow leadership anomaly that is crowding out good performance in other parts of the market. And anyone on the wrong side of this trade has felt the impact of underperformance.

So how should investors be navigating this sea of uncertainty?

Known knowns

At a time when investors are facing many unknowns, it is almost impossible to accurately predict the future. Yet, despite this ambiguity, there are still knowable knowns to be found.

Previous market cycles have taught us that major shifts in the economic landscape generally lead to changes in leadership. So, we must focus on what we know to help identify those sectors and industries capable of taking up the position of market leaders in the forthcoming cycle.

Fortunately, there are several clear and indisputable trends.

The path to clean energy

An energy transition will be key to solving the major social and environmental problems caused by climate change. We know there is a need to reduce humankind's reliance on fossil fuels and create better alternatives through renewable sources of energy. Despite this knowledge, the journey is not straightforward. Paradoxically, given the time it will take to develop the necessary scale of new clean energy sources, we remain reliant on fossil fuel supplies; yet supply constraints have driven up prices, making the transition process even more costly. So, while the general sentiment is that we need to invest in renewable energy sources, continued investment in fossil fuels can be vital to enabling the energy transition.

This creates a fruitful pool of investment opportunities where individual companies offer solutions to both sides of this equation. On the one hand, some services and providers can help sustain fossil fuel production more efficiently, while still considering lower carbon outputs. On the other, technology is emerging to deliver more renewable solutions, and innovations in both hardware and software are helping reduce energy usage, waste, and the scale of emissions. Market leaders in all these areas are likely to surprise in terms of margins and profitability, and therefore present classic future growth opportunities.

Growing healthcare requirements

Healthcare presents a second long-term, structural trend. An ageing global population will only result in greater demand for healthcare while, at the same time, the sector faces increasing challenges in terms of its affordability. In our view, this demographic test will present a great hunting ground for investment ideas as healthcare companies are forced to innovate to ensure more efficient delivery of healthcare services, both in the hospital environment and through consumer-led healthcare solutions.

In the post-pandemic era, the healthcare sector has faced further volatility amid the disrupted labour market for staff, while inventories have needed to be replenished from the high demand necessitated by Covid-19. These challenges are starting to stabilise, and we are optimistic about the sector's ongoing potential due to the 3 • yarracm.com clear need for innovation in the provision of new and more efficient healthcare solutions.

The resumption of travel

Finally, travel is perhaps a less obvious trend, but it's one we believe is worth exploring. The pandemic was a huge challenge for the sector, with many people under-consuming travel services simply because they were not allowed to travel. In terms of supply, the lack of demand meant the availability of flights and the development of hotels completely dried up for a period. While many consumer activities have completely normalised, travel is very much still in the process of recovery. When you look at the core consumers of travel, demand remains robust. This is particularly true for younger generations, who are placing even greater value on 'experiences' during life after lockdown.

Further, a new travel cohort is emerging from developing countries where rising gross domestic product (GDP) per capita means more people will be able to afford to travel in the future. This reflects the same growth trajectory that developed nations have already experienced in recent decades. In our view, there will be many direct beneficiaries of this significant return to global travel, from booking companies to manufacturers of luggage and travel accessories.

Chart 1: Is there a China travel boom pending? 

Addressing the known unknowns

While the investment case for established trends is relatively straightforward, it can often be harder to assess when or if an emerging trend will become a longterm investible opportunity.

AI presents an interesting example of this conundrum. While research in this area can be traced back to the 1950s, it has only recently become a commercial opportunity in the eyes of many investors. The market has quickly latched on to this development, and excitement over its potential has seen the limited number of direct AI players re-rate significantly - hence the dominance of the technology mega-caps so far this year.

Although we have few doubts that the AI theme is both real and profound, there are still many unanswerable questions. The profits and cashflows from AI are yet to materialise, so it's hard to be certain that they will be strong enough to justify current valuations. The adoption of AI is likely to have a meaningful impact across multiple industries - just as the internet did in the early 2000s - but it is difficult to identify who the eventual winners and losers of this disruption will be. There will also be geopolitical implications - the need for specific policy and regulation is already being widely debated.

While we can see the investment potential of having exposure to AI, it needs to be done in a way that's consistent with our Future Quality philosophy of focusing on the knowns rather than blindly following the hype. A raft of companies are benefitting from the rising tide of AI, but only hardware companies are currently seeing any tangible uplift in cash flow and profitability - which is what we are looking for. As more companies look to harness AI's potential, we expect to see strong long-term demand for the complex high-end semiconductors that underpin this technology. For example, Synopsys - a leader in design technology and services for the semiconductor market - could benefit strongly as companies' demand for exceptionally complicated design services grows. Similarly, Hoya is a leading supplier and manufacturer of high-tech components used by semiconductor manufacturers and should be a beneficiary of increased demand.

Future Quality in the Year of AI

While it's impossible to know the ultimate direction of travel, we do know that we are in the midst of a regime change to a world of slower growth that will endure bouts of persistently higher inflation. It is also a time of significant technological transformation that not only encompasses AI but will drive the energy transition and provide new healthcare solutions.

History tells us that during such inflection points, companies delivering high growth and sustained high returns of basic capital - classic Future Quality companies - earn the right to be market leaders and that these companies may come from different areas of the market to the leaders of the previous cycle.

As investors, we believe it's essential to stick to what we know, particularly during times of unpredictable change. Our investment approach is focused on identifying and investing solely in Future Quality companies, those with superior long-term returns on investment that have been shown to deliver better performance over time.

In our view, it is these Future Quality companies, especially in sectors aligned with secure, long-term trends, that will be the market leaders of tomorrow.

With the upcoming Voice referendum in Australia, the nation stands on the cusp of a significant constitutional change, emphasising the acknowledgment of Aboriginal and Torres Strait Islanders as the original inhabitants and the establishment of an Aboriginal and Torres Strait Islander Voice to Parliament. Here we aim to assess Australian corporate performance in the context of the indigenous reconciliation journey, particularly focusing on Reconciliation Action Plans and their varying stages.

Reconciliation Action Plans

Reconciliation Action Plans (RAPs) seek to enable organisations to take meaningful action to advance reconciliation.

Based around the core pillars of relationships, respect and opportunities, RAPs aim to provide tangible and substantive benefits for Aboriginal and Torres Strait Islander peoples, increase economic equity and supporting First Nations self-determination.

The four stages of a RAP are as follows:

1. Reflect: At this stage, organisations acknowledge the need for change and express their commitment to reconciliation. This stage, which normally takes around 12 months, involves building relationships and cultural awareness within the workplace.
2. Innovate: The Innovate stage focuses on implementing specific initiatives and programs that promote meaningful engagement and partnerships with indigenous communities. This stage normally takes around two years.
3. Stretch: Organisations at the Stretch stage are dedicated to integrating reconciliation into their core operations and actively seeking opportunities to advance indigenous participation, employment, and procurement. This stage normally takes around 2-3 years.
4. Elevate: The Elevate stage signifies a comprehensive and sustained approach to reconciliation, incorporating significant changes in organisational policies, practices, and cultural competency, ultimately striving for measurable outcomes.

Corporate Performance and RAPs

There are presently 43 companies in the S&P/ASX 100 with RAPs in place. These companies are distributed across the Reflect, Innovate, Stretch, and Elevate stages. Notably, 57 companies in the ASX 100 do not have RAPs, suggesting that there is room for growth in corporate engagement in indigenous reconciliation.

The breakdown of companies by RAP stage and their associated values in the ASX 100 is as follows:

• Reflect: 12 companies with a total value of $300 billion
• Innovate: 14 companies with a total value of $125 billion
• Stretch: 10 companies with a total value of $400 billion
• Elevate: 7 companies with a total value of $120 billion

Figure 1: S&P/ASX 100 RAP Breakdown (number)

Source: IRESS, Reconciliation Australia, Tyndall AM, Oct 2023.

Figure 2: S&P/ASX 100 RAP breakdown (total market cap)

Source: IRESS, Reconciliation Australia, Tyndall AM, Oct 2023.

Additionally, sector-wise analysis demonstrates varying levels of engagement with RAPs:

• Financial sector companies exhibit substantial engagement, with 12 out of 19 companies having RAPs.
• The industrial and property trusts sectors also demonstrate significant engagement, with 7 out of 14 and 6 out of 10 companies having RAPs, respectively.
• Conversely, sectors including consumer discretionary, consumer staples, healthcare, and information technology lag behind in terms of RAP adoption.

Figure 3: S&P/ASX 100 RAP breakdown by industry

Source: IRESS, Reconciliation Australia, Tyndall AM, Oct 2023.

Specifically relating to the Voice referendum, it is interesting to note that 14 of the top 20 listed companies in Australia have expressed public support for the Voice. Somewhat surprisingly, of these 14 companies only 11 currently have RAPs. Less surprisingly, none of those 11 companies are at the Reflect stage and the majority are at the Elevate stage or beyond - essentially companies that are more progressed in their own reconciliation journey.

Figure 4: S&P/ASX 20 Voice Support

Source: IRESS, Reconciliation Australia, Tyndall AM, Oct 2023.

Incorporating Reconciliation into our ESG approach

ESG has always been a critical part of the Tyndall investment process. More recently we have added structure to the process via the development of an ESG scorecard amongst other longstanding initiatives including active ESG engagement and independent thought on ESG related matters. While social issues and diversity and inclusion performance have always been considered, we have recently updated our scorecard to specifically reflect where companies are at in their RAP journey.

Conclusion

Regardless of the outcome of the Voice referendum, it is clear that corporate Australia will play an increasingly significant role in progressing indigenous reconciliation efforts. This includes fostering genuine relationships, creating inclusive workplaces, and supporting initiatives that empower Aboriginal and Torres Strait Islander peoples. The pre-Voice referendum assessment of Australian corporate performance in the indigenous reconciliation journey through RAPs reveals both progress and areas for improvement.

While a notable number of companies have embraced reconciliation through the RAP framework, a significant proportion is yet to make a commitment. Encouragingly, there appears a growing understanding and acknowledgment of the need to meaningfully engage with indigenous communities.

Author: Michael Ward, Senior Research Analyst

Ferrari is one of the world's most iconic brands. It's also an amazing stock. Ferrari was founded in Italy in the 1940s and was spun off from Stellantis in 2016 under the ticker RACE IM.

The IPO price was EUR43 and Ferrari is currently trading at ~EUR300 for a 600% return since listing. The analysis below outlines the Case for RACE and highlights 4 main reasons to why we love the stock.

RACE Stock Price Since Listing in 2016

Reason #1: High margin, high return, high growth business
Ferrari has achieved the holy trinity of high returns, high growth and a reasonable valuation. RACE boasts gross margins of ~50%, net margins of over 20% and an ROE of approximately 40%. This margin and non-cyclical earnings profile is why Ferrari is typically considered a luxury stock like Hermes, rather than an auto stock like GM, Ford or even Mercedes.

Point #2: A+ industry structure leads to earnings visibility and upgrades
When I was a student at Harvard Business School I did many case studies applying the Porter's 5 Forces Framework. The 5 Forces is an analytical tool developed by Michael Porter in the late 1970s to analyse industry structure and competitive environments.

From this perspective, Ferrari is literally the textbook case of an A+ company. They are a heritage brand with incredibly high barriers to entry, they have few competitors, few substitutes, price insensitive customers with very little bargaining power, and a supply chain that is localised and very difficult to replicate.

The net result is that Ferrari has an immense level of control over its own earnings and strong earnings visibility. Management upgraded its FY23 revenue guidance, adjusted EBIT margin guidance as well as adjusted EPS and FCF estimates at the last result. More importantly, this upgrade cycle is a consistent pattern shown by RACE management since listing.

Reason #3: Impressive Brand Recognition and Unique Positioning Among Auto Peers
Ferrari is repeatedly recognised as one of the world's leading brands and they are confident in what their brand stands for and who their target customer is. Most auto meetings these days are focused on the transition to EVs and the rise of autonomous driving (AD). While these are important strategic directions for the auto sector as a whole, it often feels like the companies are in a RACE (no pun intended) to out electrify and out tech each other.

Ferrari is refreshingly contrarian on both these fronts. Ferrari management has made a strong commitment NOT to get into autonomous driving (AD). The whole point of buying a Ferrari is to drive it yourself!

While Ferrari is a leader in hybrids with approximately 45% of deliveries already in the hybrid space, it's first fully electric car will not be presented until 2025 with the first deliveries the following year. They do not expect pure EVs to be more than 5% of total shipments by 2026.  Part of this is strategic positioning that one of the great joys (so I am told) of owning a Ferrari is the vrooooom, sound it makes when you start the ICE engine. EVs don't vroom so Ferrari plans to continue to develop ICE engines into the 2030s.

Reason #4: Technological leader
Technological leadership comes in part from the company's F1 racing pedigree. Scuderia Ferrari has been racing in the Formula 1 World Championship since the series was launched in 1950. RACE transfers technologies initially developed for racing to its road cars, which reinforces the brand identity and the scarcity value of the vehicles. Examples include steering wheel paddles for gear shifting, the use and development of composite materials, which make cars lighter and faster, and technology related to hybrid propulsion. RACE road cars have also benefited from the know-how acquired in the wind tunnel by racing car development teams, enjoying greater stability as they reach high speeds.

Investment Risks
Of course, no stock is without risks. For Ferrari, the main risks are that it is a single brand, single product company and therefore lack the diversification of a luxury stock like LVMH or a more diversified auto company like Mercedes or Tesla. From a governance perspective, this is still to some extent a family endeavour with the Agnelli family de facto controlling approximately 51% of the voting rights of the company. Finally, Euronext Milan is not the most liquid market so the Average Daily Traded Value (ADTV) of Ferrari as a EUR50 billion market cap company, is less than it would be if it was traded in the US or France.

Conclusion
The case for RACE is clear. Ferrari is a high margin, high return, high growth company operating in a competitive environment with high barriers to entry, few competitors, leading technology and loyal customers. What's not to like about Ferrari?