Reporting season takes off…
What a week! The start of reporting season, and a return of Trump and Xi-inspired market volatility. Which suits us just fine. Because, with plenty of cash, we’re ready to invest in good quality businesses that may become cheaper if the market turns down.
On the one hand there are fears that a proper trade war could trigger a global recession. On the other hand, the belief that the Fed’s safety net will protect investors.
For Australian companies not exposed to slowing domestic residential construction activity and retail sales, the impact on China of tariffs and the commination that is Xi’s Yuan devaluation may be all that matters.
We have long argued that the near 40 per cent decline year-on-year in housing approvals would represent a cliff for construction activity. And that cliff has arrived. Given residential construction employs 3.5 per cent of the Australian workforce and activity could drop as people spend less at the shops. That could feed negatively into the outlooks for all retailers, not just those that are directly exposed to fixing and furnishing houses.
The bulls argue that the Fed has your back and rates will remain lower for longer and continue to support equities. There’s a strong mathematical reason to agree and we are amenable to the truth in the aphorism ‘don’t fight the Fed.’ Keep in mind that while second quarter global growth was relatively weak, underlying fundamentals for the global economy remain reasonably solid. Global jobs markets are still tight, inflation is low and interest rates, as I have already mentioned, remain low and declining.
The bears argue that market valuations are super-stretched and prices have divorced from the underlying company outlooks. There’s some truth to that too.
In Australia, reporting season is expected to deliver FY2019 earnings growth that is materially lower than the previous year. According to consensus, Australian stocks are expected to deliver earnings growth of just 1.9 per cent, materially lower than the 4.0 per cent growth in the previous year.
Resources however are delivering all of that growth with 15.5 per cent expected in FY2019, on top of approximately 27 per cent last year.
Excluding resources, consensus Australian company earnings are expected to fall by almost 5 per cent. Having noted the slowdown, some brokers, such as Macquarie, believe this reporting season represents the “trough of the cycle” and are forecasting earnings growth of as much as 9.3 per cent in FY2020.
This reporting season will certainly reveal how willing investors remain to pursue high prices for yield, even as earnings growth slows or turns negative.
But aggregates don’t matter if you are an investor in individual companies, which we are. We think there will be weak outlook statements by companies exposed to building and retail and downgrades could follow.
Some companies that brokers fear have a negative risk to their outlook include A2B Australia (ASX:A2B), AGL Energy (ASX:ALG), Autosports Group (ASX:ASG), Costa Group (ASX:CGC), Corporate Travel Management (ASX:CTD), FlexiGroup (ASX:FXL), G8 Education (ASX:GEM), Netwealth (ASX:NWL) and Webjet (ASX:WEB).
Nevertheless, there are always opportunities during reporting season and remember we have cash at the ready and we have already identified high quality value opportunities here and overseas. Some of the companies brokers think could be re-rated upwards include, Altium (ASX:ALU), AMA Group (ASX:AMA), Appen (ASX:APX), Ausdrill (ASX:ASL), Bingo (ASX:BIN), Cleanaway (ASX:CWY), Freedom Food Group (ASX:FNP), IDP Education (ASX:IEL), Infomedia (ASX:IFM), Imdex (ASX:IMD), Kogan (ASX:KGN), Megaport (ASX:MP1), Nanosonics (ASX:NAN), NRW Holdings (ASX:NWH), Prospa Group(ASX:PGL), Pro Medicus (ASX:PME), Servcorp (ASX:SRV), Super Retail Group (ASX:SUL) and Tassal Group (ASX:TGR). You will notice there are companies exposed to building and retail in that group so equity investing really is about researching individual companies.
Of course, if any of the above companies surprise the brokers by not delivering to expectations, there will be volatility.
For this year’s reporting season calendar we refer you to Commsec here.
The Montgomery Alpha Plus Fund own shares in Super Retail Group. This article was prepared 08 August with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Super Retail Group you should seek financial advice.