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

As the new academic year kicks off, students in Europe are confronted with a shortage of good-quality student accommodation. Relative to the UK, the purpose-built student accommodation (PBSA) market in Europe is at a much earlier stage in its evolution.

The demand for higher education in Europe is rising, driven by a steady increase in domestic and international students. In 2002, only 22.5% of adults living in the EU were educated to degree level. By 2021, that figure had risen to 40% - the European Commission's long-term target [1]. Momentum remains strong, with access to tertiary education still under the spotlight. In 2022, student enrollments increased or remained stable in 87% of European cities. Rising international student populations are further exacerbating the demand in Europe, too.

With limited supply, these fundamental drivers are creating a compelling opportunity for investors to source long-term stable cashflows from the sector. Investment in European PBSA hit €15.4 billion in 2022. This was 47% higher than 2021, 37% higher than 2019 (pre-Covid levels), and 39% higher than the five-year average. Our research on more mature PBSA markets, like the UK, demonstrates how this opportunity can evolve. 

The demand for higher education in Europe is rising, driven by a steady increase in domestic and international students

Examining the provision rate

In 2022, PBSA occupancy rates averaged 98% in Europe's major cities [2], a level that far exceeds commercial real estate sectors. The demand has also been counter-cyclical to gross domestic product. When there's a downturn in the economy, the demand for student beds rises as more people either enter tertiary education or extend their studies beyond undergraduate degrees. Even during the pandemic and strict lockdowns, university admissions remained resilient and even grew in some cases.

However, the provision rates tell the true story. The average provision rate (defined as the student-to-bed ratio) in Europe is 25%. This ranges from 4% in Italy to 33% in the UK. At a city level, London is 31%, Amsterdam is 29%, Copenhagen is 21% and Munich is 15% [3]. With high inflation, debt and construction costs, development activity is insufficient to absorb current and future demand from both domestic and overseas students. Even if all planned developments go ahead, the European provision rate will remain less than 15%.

This leaves students at the mercy of individual landlords in the private rental market, which can mean they end up living further away from university campuses. Private accommodation is often more costly because of open-market rents, non-inclusive energy bills, travel, and extra costs for entertainment and facilities. Importantly, a lesser 'student experience' means institutions risk falling behind the current expectations of domestic and international students in an increasingly competitive environment.

'Internationalisation' in higher education

'Internationalisation' is the process of integrating cross-border students into European institutions [4]. The top 10 universities in Europe are in the UK and Germany, of which international students account for between 19% and 73% (London School of Economics 73%, University of Oxford 42%, ETH Zurich 41%, and LMU Munich 19%) [5].

This proportion has grown considerably in recent years, owing to a rise in English Taught Bachelors (ETBs), which accommodate a broader range of students. The UK, Germany, the Netherlands and Italy comprise the largest population of English-taught students. International students tend to want higher standards of accommodation in bespoke premises, with higher security than domestic students. A shortage of suitable PBSA stock is a limiting factor for institutions that want to attract this important source of revenue. For investors, this type of PBSA can provide scope for specialisation, with higher premium units and longer-term lets available for overseas students.

Chart: Countries accounting for highest past enrolments

Source: Studyportals, abrdn, June 2023

Diversifying the student base

For European PBSA assets, it is less common for investors to have a lease with a university or a business operator. It is more typical to have exposure to individual tenants and turnover. This is critical as the risk of higher void rates can have a more direct impact on performance in European PBSA. Schemes that are backed by a diverse range of international students tend to support more resilient cashflows. Where there is a strong dependency on one source of international student, there is a risk that the source slows or is diverted.

Brexit is a good example of a structural shift that can happen almost overnight. The number of EU students coming to the UK plummeted by 50% in 2022, after Brexit-related changes meant they lost their discount on tuition fees. Non-EU international students have filled these places, but this has changed the dynamic in the UK market. In addition, student visa reforms and anti-immigration laws hinder future enrollment rates from Europe, in particular.

In the UK, the highest number of international students are from China, India and the US. European student flows are more fragmented, though, driven by a shared colonial history, languages, politics and geographical relationships. In France, most students are from Africa, given the shared colonial ties; Portugal has the most Brazilian students because of their colonial and economic links; and Austria and Germany receive students from each other as they share a common language and are neighbouring countries. The chart shows the differences in student flows and the implied opportunities and risks within the international student mix. The diverse range of international students is a distinct advantage for European PBSA.

With the UK government introducing stricter policies, EU institutions are an emerging alternative for international students. This trend could allow the EU to close the gap on the UK. It's not a one-way ticket, though. The Netherlands is another maturing PBSA market that is home to many top universities and international students. But it could cap international student enrollment and recruitment in the future. The tight housing market in major Dutch cities is a major political issue and there are simply not enough beds to supply all students with good-quality accommodation.

It's all about distinction

Given the demand and supply fundamentals, we believe there will be strong potential opportunities for investors to grow meaningful allocations in good-quality and well-located European PBSA.

The deglobalisation trend that has been fuelled by geopolitics, means investors cannot simply 'wing it' when it comes to European PBSA. It is important to focus on the best university towns and cities, backed by the most diverse range of student flows, and a strong and growing domestic student population.

1. 3-22042020-BP-EN.pdf (europa.eu)
2.  Bonard report, 2022
3. CBRE report (May 2023)
4.   European Parliament study on internationalisation of higher education - EAIE
5.   Times Higher Education

Author: Hong Bui, Real Estate Investment Analyst, Europe, abrdn

Globally equity markets in September declined materially driven by rising bond yields. In the US, the S&P 500 fell -4.9%, whilst the Nasdaq declined -5.8%. In the UK, the FTSE 100 outperformed, rising +2.3%, due to its heavy resources and lower technology weightings.

In Australia, the All-Ordinaries Accumulation Index fell -2.8%. Energy was the best performing sector (brent crude oil rose +9.8%), whilst real estate and technology were the worst performing sectors, both impacted by rising bond yields. Small caps underperformed as investor risk appetite weakened, with the ASX Small Ords Accumulation Index falling -4.0%.

In bond markets, the US 10-year bond yield climbed +43bp to close at 4.54%. Its Australian counterpart saw the yield increase +46bp to 4.49%. The increase in bond yields was the main story for financial markets in the month and was driven by expectations that high inflation will be more persistent and hence require more rate hikes from central banks over the next 6-12 months. The Australian dollar was flat, closing at US$0.64.

"Small caps have gone through scotched earth in the US & here," Bell Potter highlights, with JP Morgan showing small caps to be the most volatile and lowest returning asset in the past ten years. JP Morgan also shows us inflation still running above trend in developed markets, leading to a "relentless" rise in bond yields according to SentimenTrader - the flipside of which is a massive equity-like drawdown in bonds charted by @leadlagreport. Mortgage repayments, @cullenroche notes, have rocketed up. But P/E multiples haven't really responded to the shift in rates yet - Endeavour Equities charts the gap between the Nasdaq's P/E and real yields - then points out that in 1987 a P/E derating lagged higher real yields. Factset has the S&P 500's forward P/E at 17.7x, just above the 10 year average of 17.5x (calculated over a period of lower interest rates). Equitable Investors looked at Australia's 10-year government bond hitting a high not seen since 2011 as the spread between the bond yield and the ASX 200 dividend yield turned negative. We also looked at the spread between corporate "high yield" debt and the earnings yield in the US. That's as credit ratings agency Fitch sees corproate interest coverage declining "modestly" as rates stay higher for longer. Finally, Morningstar charts how Australian consumers are spending more of their income and saving less.

Weighted harmonic average P/E (excluding non-earners) for the Russell 2000

Source: Bell Potter

World equity market returns

Source: JP Morgan Asset Management

Headline consumer prices year-over-year, quarterly data

Source: JP Morgan Asset Management

US bond yields rise as news articles label the move "relentless"

Source: SentimenTrader, Bloomberg

2020-2023 - 20+ year US treasury drawdown compared to largest stock

Source: @leadlagreport

Monthly mortgage payment using median existing home pirce in US with a 20% down payment & average 30Y mortgage rate

Source: @cullenroche, Bloomberg

Nasdaq P/E v inverse of the real yield on 10 year inflation-protected treasuries

Source: @EquitOrr / Endeavour Equities

In 1987 P/Es derated as a delayed reaction to higher real yields

Source: @EquitOrr / Endeavour Equities

S&P 500 forward 12 month P/E ratio - 10 years

Source: FactSet

Australian government 10-year bond yield

Source: Iress, Equitable Investors

Spread between S&P/ASX 200 dividend yield & 10 year bond yield

Source: Iress, Equitable Investors

Spread between US BBB corporate bonds and the S&P 500 earnings yield

Source: GuruFocus, Equitable Investors

US "high yield" corporate bond default rates rising

Source: S&P

Change in Fitch's forecast for 2023 inveterst coverage (EBITDA / interest)

Source: Fitch

Real household incomes declining and saving rates low

Source: Morningstar, ABS

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?