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Economic insights from reporting season

Economic insights from reporting season

In this week’s video insight, I review the question of whether a recession is imminent. There has been no shortage of talks of a recession lately, although if we dive deeper into what we have seen in markets over August and September a compelling counterpoint to this narrative is visible.

Transcript:

Today, we dive deeper into August and September’s economic panorama, and attempt to paint a picture with the information garnered from reporting season and recent data.

There’s been no shortage of recession talk lately. However, an in-depth look at August’s data offers a compelling counterpoint to this narrative. Rising living costs and increased interest rates are valid concerns, yet specific sectors have reacted not just with resilience but with verve. It is fair to say many analysts went into the reporting season a little too bearish. 

Meanwhile, National Australia Bank’s monthly survey of business confidence released on Tuesday revealed business confidence edged up slightly in August, remaining above average levels. Measures of trading conditions, profitability and employment all rose, with a broad-based uptick recorded in conditions across most industries.

The data supports widening expectations that the Australian economy is on track to avoid a recession over the coming year.

Returning to economic insights from reporting season, let’s discuss the booming sectors. The global travel market, including airlines and luxury sectors, are demonstrating robust growth, a testament to changing consumer behaviours away from goods and towards experiences or services, as well as pent-up demand. Additionally, discount retailers have surged, marking significant growth. This trend is noteworthy and reinforces the trend we have seen of consumers trading down and or reducing their basket size.

Turning to the corporate strategies, there’s a conspicuous aura of restraint. Few management teams are unveiling their forward strategies, a trend entrenched since the pandemic’s advent. Although these revelations have been limited, the prevailing theme from those who have shared is one of adaptability and resilience. Companies were particularly boastful about managing their inventory. This cautious optimism is a useful barometer of where we might be heading in the next few quarters.

Diving deeper into forecasts, and as we’ve reported previously, the projections for financial year 2024 and financial year 2025 earnings saw a slight downward tilt reflecting perhaps a broader cautious sentiment permeating the analyst community.  I have often wondered when a company misses analyst expectations, was that the company’s fault or the analysts?

The dividend landscape in August was, to be candid, less than ideal. It’s clear from the past two years, companies are increasingly reticent to increase dividends, preferring to hoard cash and or pay down debt. The looming question that remains is: are businesses preparing for more frugal payout ratios in the future and frugal strategies amidst an ever-evolving economic backdrop?

This may not sit well with the aging demographic of baby boomers who are increasingly reliant on steady and ideally increasing income from dividends.

Another trend within the investment community that’s been evident is a lean towards large-cap defensives. But, as many of these entities fall short of their “aspirational” valuations, and that’s putting it mildly, dependent as they are on ever-increasing growth rates, it beckons a broader question; Might we find more lucrative returns in small caps? Use the search bar on the blog to look up small caps and to hear our latest thoughts.

Beyond the numbers, the qualitative elements present insights too. After examining a myriad of company results and their transcripts, a distinct narrative emerges; We’re observing a departure from recurring concerns such as inflation and wages. Instead, there’s a pronounced focus on financial robustness, funding strategies, and maintaining balance sheet integrity.

August saw laudable performances from the Retail, and Travel sectors, as well as building materials but the month wasn’t universally triumphant. It is clear a focus on quality remains the evergreen priority for investors who want to continue to outperform in the long term.  Nevertheless, the overarching message remains clear: the economy, though undergoing turbulence, remains intact.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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