The first half reporting season kicks off later this week and according to the latest Thomson Reuters earnings estimates, earnings per share growth for the S&P/ASX200 index is forecast to grow by 7 per cent in the first half of 2018, down from the 11.3pc recorded in financial year 2017. This pace of growth is forecast to continue over the next two years (2019 – 5.9pc, 2020 – 5.2pc) providing a platform for steady equity returns, with stronger global growth and improving business conditions offering the upside.
While a lot has been said of the below trend growth in the Australian economy and the sluggishness in earnings growth outside resources, forward-looking indicators of business activity continue to indicate broad expansion in activity. After a prolonged period of cost-out and consolidation, it is encouraging to see a sustained pick-up in business conditions and sentiment which we expect to continue to feed into earnings growth.
In our view the sectors best placed for upside surprise this reporting season include resources, offshore earners and retailers.
Resources stocks offer upside risk to dividend expectations given key commodity prices (oil, iron ore, coal) have traded well above consensus expectations through late 2017. Bulk commodity miners BHP Billiton, RIO Tinto and Fortescue Metals, offer the best upside capital management potential. The major miners have maintained an unrelenting cost focus through the recovery stage of the cycle, which we don’t expect to change. At current levels of super-profitability, and with the support of synchronised global growth, we think that the miners will increasingly turn their attention to growth, while being able to maintain higher shareholder returns.
The resurgence of the European economy and the Trump-led economic reforms in the US are poised to continue to buoy ASX offshore earners. While Australian economic growth is improving, offshore markets continue to set the pace for an economic rebound. We expect to see companies further clarify the extent of the US tax reform benefits via their results.
2017 was tough for the retail sector with valuations under pressure ahead of Amazon's entry and persistently shaky consumer confidence. We remain cautious heading into 2018, but do continue to see select buying opportunities amidst the “noise”. The impact Amazon is having on US retailers 10 years on is significant, so we can’t underestimate the potential impact locally. However, just as has happened overseas, we believe the stronger/category killer retailers who have invested for years ahead of this step-change in competition, will survive and potentially even prosper in a post Amazon world.
- Justin Still, Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410