Despite high interest rates squeezing household spending, and key economic indicators flashing amber, the Australian sharemarket last week climbed to a record high.
It seems like a positive backdrop leading into earnings season, when some of the country’s biggest companies will report their results, update investors on their outlook and provide an insight into what they’re seeing at the coal face.
But some have already issued downgrades. Geopolitical tensions hang in the balance. And a rate cut is still expected to be at least some months away.
A flood of earnings results will be delivered this month, with firms including AGL, Mirvac, and Boral due to report this week. As companies prepare to reveal their numbers, fund managers and strategists have been reviewing their bets and thinking about the factors likely to shape this season’s narrative.
Weaker spending to test consumer stocks
With retail trade data from the Australian Bureau of Statistics last week showing a 2.7 per cent drop in retail turnover from November to December, and monthly turnover growth falling to its slowest rate since August 2021, some consumer companies look to be in the firing line of weaker household spending.
JP Morgan Asset Management global market strategist Kerry Craig says he doesn’t expect a big shift but expects to see some consumer discretionary companies – and even staples – take a hit as household spending has eased.
“Consumer stocks did quite well last year, but we are starting to see it turn,” he said. “Inflation is still running in line with wage growth and there’s still some roll over and refinancing of mortgages,” he says.
Jessica Amir, market strategist at trading platform Moomoo, says some consumer discretionary companies such as Harvey Norman and Lovisa had already seen downgrades amid weaker economic conditions, but that others could be more resilient.
“Consumer discretionary income is not growing, and unemployment is expected to rise,” she says. “But companies such as Super Retail Group and Premier Investments are still holding up because people still need to buy things like clothing.”
Atlas Funds Management chief investment officer Hugh Dive says the higher cost of doing business has weighed on retailers including Coles, Woolworths and Endeavour Group, but that results across sectors would not be uniformly good or bad and needed to be considered against peers.
“For example, people like KFC, but not Domino’s,” he says. “And JB Hi-Fi’s sales have been flat recently, but they’ve taken market share.”
Bell Direct market analyst Grady Wulff says while investors had thought retail companies’ earnings would drop last year, it was happening later than expected.
“Retailers did quite well last year,” she says. “Some, which operate in a niche, like Accent Group, might not be as affected, but a lot of Australians are starting to feel the bite of higher cost of living and interest rates.”
Geopolitical uncertainty and the country’s commodity giants
As the United States heads into a presidential election year, Chinese growth remains sluggish and tensions continue in the Middle East, investors are weighing up the effect on Australian shares, and especially the impact on the country’s commodity giants.
Amir says mining stocks are likely to see a turnaround in earnings after weaker results last year.
“There was some earnings decline in the prior corresponding period because commodity prices declined,” she says. “Now, iron ore, copper and aluminium prices are stronger, and copper imports have seen some of the biggest jumps in two years as China increases demand for Australian exports, so miners are looking attractive.”
Craig says while lithium prices have been a drag for some materials companies, bulk miners seemed to be doing well as China continued to expand – even if at a more moderate pace – with domestic and international outlooks more broadly showing growth risks were likely fading out.
Dive says while there was some negativity in markets during the August to October period because of geopolitical risks including those in the Middle East, many Australian companies would not be affected because they primarily served the domestic market.
He also says conflicts such as the war in the Middle East could be a positive for Woodside because it showed the value of Australian liquid natural gas assets.
Wulff expects miners to register lower sales because of weaker Chinese demand but says stronger commodity prices could offset some of the impact.
“We’re still waiting for a big stimulus package from China to reignite growth,” she says. “But the strong iron ore price will support the financials of these mining companies, so their results won’t be too bad.”
Defensive companies to come out of hiding
While defensive ASX stocks such as those in healthcare have broadly seen softer share price performance and earnings in the past year, taking a hit from developments including that of drugs such as Ozempic, some investors predict a turnaround.
Craig says softer inflation figures suggest the Reserve Bank is done with hiking rates and that they may start cutting as early as the end of the year, helping defensive companies such as real estate investment trusts and healthcare firms.
Amir says healthcare companies dropped last year on the back of Ozempic-fueled fear-selling but that she is starting to see healthcare stocks rebound, especially with interest rates in the US and Australia seeming to have peaked.
“There are more bets for interest rate cuts than hikes, which is optimistic for healthcare companies and for equities more broadly,” she says.
Meanwhile, Wulff agrees the healthcare sector is looking positive, although she says investors will be looking closely at which companies have clear pathways to commercialising their developments and reaching profitability.
“The healthcare sector has hit the ground running in 2024,” she says. “It also tends to outperform over longer, 10-year periods.”
Financials: a tale of two industries
Banks are always in the spotlight during earnings season because their results and observations serve as a gauge for the health of the economy. This year, markets will also be keenly eyeing insurance companies which look to have found their stride amid higher interest rates.
Australian Eagle Asset Management chief investment officer Sean Sequeira says many investors will be looking closely at the banks, but that earnings for the country’s biggest bank – CBA – will be especially telling when they report their results on February 14.
“They will provide great insight into different sectors and economic conditions, including whether debts are performing as expected,” he says.
Meanwhile, he says insurers such as QBE were going into earnings season with strong momentum.
Wulff says banks’ smaller net interest margins – a measure of profitability comparing their funding costs with what they charge for loans – would likely lead to an easing in profits for the big four banks.
“It looks like net interest margins peaked in the 2023 financial year, and there’s been a record number of people switching home loans and mortgages,” she says. “However, some alternative banks have been performing better, with the likes of Judo Bank recently reporting a 24 per cent jump in profits.”
Amir also says many financials companies have had their earnings expectations slashed.
“The bar is set low for financials, so we could get a surprise,” she says. “There’s lingering pain and the drag of higher interest rates, savings are still down considerably from COVID highs and lending is continuing to slow. Banks’ profitability is not going to shoot the lights out.”
However, she says insurance companies will likely report improved profitability amid increased insurance premiums.
Overall, investors appear to be heading into earnings season with tempered optimism.
After a decline in earnings last year, Amir says this year will be a completely different story. Despite some downgrades, she says there’s likely to be a substantial earnings turnaround. “Markets will probably have a bullish year,” she says.
Craig says Australian equities are not overly expensive on a price-to-earnings basis, especially compared to the US, and that despite some nuances and companies facing margin pressures, it looked to be a positive year ahead. “Financial conditions are easing with rate cuts on the horizon, which creates an environment where equities can do well,” he says.
Meanwhile, Wulff says she is more cautious heading into earnings season amid the macroeconomic impacts on the market, with high interest rates continuing to bite.
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Source: Thanks smh.com