After an extended period of benign volatility over the past 12 months, February proved to be a roller coaster ride on financial markets with the beginning of the month starting with a two day fall of 7.7 per cent on US markets and 4.8pc on the Australian market.
Markets have since recovered the bulk of these losses throughout the month.
The sharp move down in markets was the result of early signs of wage increases in the US, after circa 20 years of benign wage growth, increasing the risk of rising inflation and therefore the pace of rising interest rates in the US.
Markets had been expecting 3 rate rises of 0.25pc in the US, prior to this.
The market is now expecting there to be 4 rate increases this year.
So despite increasing evidence of synchronised global economic growth and improving company earnings, markets are becoming increasing sensitive to rising interest rates, given they impact the borrowing cost of companies and also company valuations themselves.
On the home front this month, companies have been reporting on their first half financial profit results.
As of last Friday, 84pc of companies under Morgan’s research coverage had reported their first half.
Of the industrials stocks that we cover, these companies are having their best first half reporting season in several years.
Companies that have beaten analyst’s forecasts have outnumbered misses at the rate of almost 2 to 1, which is the strongest rate we've recorded over the last 5 reporting seasons.
It's particularly pleasing to see more beats and fewer misses among the most important of large cap ASX 50 stocks.
This contrasts with large cap disappointments which dragged on the market lower last August.
We needed strong results at the top end of the market to justify elevated valuations heading into February, and the fact there were fewer problems at the top end is encouraging.
One of the standout themes to have emerged from this reporting season so far has been the willingness of parts of the mining sector to openly flag their ambitions to grow by acquisition.
Broadly speaking, large and medium sized miners are enjoying very strong balance sheets (RIO Titno is heading toward net cash) and many have brought previously stretched balance sheets well and truly back under control (Fortescue Metals, Whitehaven Coal).
Some are actively buying back their own shares (RIO Tinto, S32), some are conducting "capital management reviews" (Whitehaven Coal, Oz Minerals) but more and more mining companies are flagging their willingness to acquire other companies within the sector.
- Justin Still, Investment Adviser (Authorised Representative: 000279726), Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410