The start of September wraps up the financial year reporting for the ASX. We noticed that fewer than usual corporates exceeded the market’s expectations this reporting season, with notable large cap misses from the likes of Telstra, Ramsay, Suncorp and Woolworths.
Overall financial year 2017 profit growth for industrials companies of 6.3 per cent is steady but uninspiring given expectations were for growth of 7.4pc. Expectations for financial year 2018 profit growth now sits at 6.3pc, or 9.4pc excluding banks and financials. With elevated valuations heading into results (>16x forward price earnings) and this level of profit growth, it’s not surprising the market was tough to please in August.
Corporate outlook statements were again broadly cautious reflecting several uncertainties in the economy. Result insights and themes from reporting season:
Earnings tailwinds – business surveys have been robust but have yet to translate into earnings, while the sluggish consumer sentiment remains a drag on demand.
Capital investment and buybacks – investors were torn between capital returns and re-investment in growth. A pick-up in capital expenditure could suggest corporates now need to reinvest after years of cost-cutting to sustain market share. Improving demand in some sectors suggests corporates are reinvesting for future growth.
Earnings per share certainty versus growth – genuine growth in earnings per share remains scarce particularly as some of the positive catalysts the market has come to rely on have fallen by the wayside. An example of potential positive cataylsts are the Trump bump, easing monetary policy, lower Australian dollar, and upside surprise to Chinese growth. It is no surprise sectors such as utilities and infrastructure have outperformed – we see no reason for this to change over the short term.
Market rotation – the disappointing growth outlook for large caps and some notable large caps refraining from further capital return (Telstra, AMP, Suncorp and CSL) have seen a reversal in sentiment towards small caps which saw a +1.7pc return over the course of the month despite -2.4pc earnings revisions. This suggests to us that price has more than reflected investors’ low expectations.
Retail wobbles – There’s little doubt it remains an uncertain environment for retailers. However expectations appear to have been rebased and most retailers are cycling weaker corresponding periods. There were some notable bright spots among the retailers.
We think the market’s frustratingly sluggish trade reflects the reality check that higher earnings – which the market was pricing in earlier in 2017 – will take longer to deliver than was hoped. Given that prices tend to over- and under-shoot around the earnings trajectory, it’s important to stand ready to accumulate preferred exposures when the inevitable bouts of market volatility hit.
- Boh Burima, Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410