How connected are the S&P/ASX 200 Index (ASX: XJO) and the broader ASX share market to the Australian economy as a whole?

If the ASX 200 is having a good year, it’s often cited as a barometer of the economy as a whole. And if there’s an economic recession on the horizon, you’ll usually find the share market isn’t doing so well.

So case closed, right?

Well, not quite.

See, the economy is just another name for the commercial network that connects every consumer and business within our society. The government forms a major part of the economy, as does overseas investment.

In contrast, the share market represents the value of every public company in the country. Nothing more, nothing less.

And the health of the economy is only one factor that influences how much investors are willing to pay for each company (represented by each company’s share price).

Mixed messages

Just take last year. In 2019, the ASX 200 had one of its best years in recent times, banking a 20.8% gain over the year. That was in stark contrast to the broader economy, the growth of which was so slow it prompted the Reserve Bank of Australia (RBA) to cut interest rates 3 times in 2019.

These interest rate cuts were a large driving force behind the share market gains. Lower interest rates lead to higher values being placed in riskier assets like shares. This in itself proves that the ASX 200 doesn’t always move in tandem with the economy.

Another point to note is that the share market is a forward-looking mechanism. This means it is always trying to price in the most likely future scenario of economic growth. As such, the share market is not necessarily a reflection of where an economy is at the present.

This is why we’ve seen a massive rally in the ASX 200 since mid-March. And this growth hasn’t corresponded to our economy improving over the same period. Rather, it’s the signs that the economy is likely to improve over the rest of 2020 that is causing the ASX 200 to surge.

The same thing occurred back in 2009 when the world was just starting to recover from the global financial crisis. The ASX 200 had one of its best years ever in 2009 – rising over 30%. In contrast, it took a few more years for the economy to bounce back fully.

Foolish takeaway

The share market is heavily influenced by the economy, but not in ways that are always obvious or easy to predict. It’s probably better to think of the ASX 200 as being shaped by what investors think the economy of tomorrow is going to look like. Of course this sentiment should also be considered in combination with other macro-factors like interest rates, unemployment and geopolitical tensions on the world stage.

All in all, I believe success with investing depends on finding long-term, winning companies. This means investing in companies that have the ability to weather the economy’s ups and downs rather than trying to predict what the ASX 200 will do over the short term.

More reading

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post How does the economy affect the ASX 200 share market? appeared first on Motley Fool Australia.

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The Austal Limited (ASX: ASB) share price is up 8.91% at the time of writing after updating its full year guidance today. The company reported that full year revenue would likely increase by $100 million to $2 billion. Accordingly, earnings before interest and taxes would increase by $15 million.

This, along with many other positive announcements, sets the company up for an explosive growth spurt.

An undervalued gem

The Austal share price plummeted earlier in the month after news that it had lost a major contract to a lower priced competitor. But I think the market has oversold this company significantly, creating a fantastic buying opportunity. 

In fact, on the same day that Austal announced its lost contract, it also announced an additional $324 million contract for the Royal Australian Navy. 

Its location is also noteworthy. Recently, I visited the US town where Austal’s US production facilities are located – Mobile, Alabama. It is hard to overstate the impact of the company there. The town of Mobile runs on the Austal operations. Aside from strategic and tactical military goals, US defence spending is designed to create jobs. In my opinion, there is no way Austal could have won any US defence work from an Australian manufacturing location – it just wouldn’t happen.

Why Austal shares are ready for explosive growth

Austal revealed an order book worth $4.3 billion in its FY20 H1 report. It has also announced considerable contract wins since that time. Over the past 5 years, the Austal share price has grown by about 12% per year on average. Its current price-to-earnings ratio is 14.9 (at the time of writing), and over the past 9 years its average P/E has been closer to 17.

This company is right in my sweet spot as an investor in manufacturing companies. It has already spent the money to build the infrastructure, has impressive relationships, and is built on a track record of honesty and quality products. I think Austal shares are likely to see explosive growth over the next 1–2 months. 

More reading

• Why Afterpay, Austal, Kogan, & Northern Star shares are charging higher
• ASX 200 down 1.2%: Westpac tumbles, Appen reaffirms guidance, Costa CEO to retire
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Daryl Mather owns shares of Austal Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why this ASX 200 share is up 8% and poised for more explosive growth appeared first on Motley Fool Australia.

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The Volpara Health Technologies Ltd (ASX: VHT) share price is edging higher today after reporting its full-year results for the year ended 31 March 2020.

Volpara is a New Zealand-based, small-cap ASX share that develops and sells software solutions. It facilitates the early detection of breast cancer by improving the quality of mammogram-based screening programs. 

What did Volpara announce?

For the 12 months to 31 March 2020, the company reported total revenue of NZ$12.6 million, up 153% from NZ$5 million in FY19. Within this, growth in subscription revenue continued its upward trajectory, up 106% on the prior corresponding period to NZ$9.1 million.

Volpara expects growth in subscription revenue to continue in FY21 as it pivots MRS Systems – a provider of breast clinic management software acquired in mid-2019 – away from a capital sales model to an almost solely software-as-a-service (SaaS) model. Additionally, the full end-to-end platform will be available for sales.

Despite an improvement in gross margins, which was up from 83% in FY19 to 86%, the company recorded a net loss for the year before tax of NZ$22.3 million. This compares to a loss of NZ$11.8 million in the prior year.

This was primarily the result of an increase in operating costs due to organic growth and the additional costs incurred after the MRS acquisition. Operating costs increased 110% from NZ$17.1 million in FY19 to NZ$36 million in FY20.

Nonetheless, as revenue continues to grow faster than operating expenses, the company improved its net margin from -235% in FY19 to -176% in the current period.

Given the uncertainty on business activity resulting from COVID-19, the company has undertaken various cost-saving initiatives. Volpara expects these initiatives will yield reductions of between 10% and 15% on annualised operating costs.

Looking to cash flow, Volpara increased its cash receipts from customers during the year by 193% to NZ$16.3 million. Its cash balance as at 31 March 2020 stood at NZ$31.4 million, which has now expanded to NZ$69 million following a recent capital raising. Importantly, the company remains debt-free.

Outlook and management commentary

Looking forward, the company recognises the world has changed with COVID-19 but highlights the critical nature of breast screening. 

Volpara will focus on long-term SaaS contracts which appear resilient despite COVID-19. Most of its contract are 5-year annual rolling contracts, paid annually in advance. The company noted that cash collection continues to be strong, with no obvious signs of any significant churn risks.

Commenting on the full-year results, CEO Dr Ralph Highnam said:

“FY2020 was an excellent year for Volpara. We successfully conducted our first acquisition, medical software company MRS Systems in the United States, and built an installed software base covering over 27% of US women screened for breast cancer.”

“Despite the current Coronavirus pandemic, we ended the year with our strongest Q4 to date and Annual Recurring Revenue (ARR) of over NZ$18M. This has set up the strong accounting revenue numbers we’re presenting today, showing very significant growth year-on-year,” he added.

At the time of writing, the Volpara share price is trading 0.35% higher for the day after being up by nearly 4% in morning trade.

More reading

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Motley Fool contributor Cathryn Goh owns shares of VOLPARA FPO NZ. The Motley Fool Australia owns shares of and has recommended VOLPARA FPO NZ. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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