Reporting season kicks off

Reporting season kicks off


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Reporting season kicks off this month, with the S&P/ASX200 index forecast to grow by 7.9pc.

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Justin Still

Justin Still

Full year (FY) 2018 reporting season kicks off this month, and according to the latest Thomson Reuters earnings estimates, earnings per share for the S&P/ASX200 index is forecast to grow by 7.9 per cent in 2018, down from 11.3pc in 2017. 

This pace of growth is forecast to continue in 2019 (+8.8pc) providing a platform for steady equity returns, assuming current market valuations holds, with steady global growth and improving business conditions offering some potential upside. In our view, the sectors best placed for upside surprise this reporting season include resources, offshore earners and a subset of retailers. 

We don’t see sufficient domestic earnings momentum to deliver a broad upgrade cycle at this stage. Global factors (lower AUD, commodities prices, US led growth) could however deliver some upside surprise to forecasts in our view. Without clear earnings momentum in either direction, the market is likely to remain range bound. In our view it is likely market rotation rather than a clear market break-out either way will define this reporting season. 

Despite rising costs in-sync with the cycle, the major miners offer clear dividend and capital management upside due to their ongoing asset divestment programs. 

Elevated valuations will again set a high bar for growth stocks, and unless earnings upgrades are likely, we prefer to err on the side of caution and take part profits where we think prices have run ahead of fundamentals. The market is at an important juncture as the valuation of growth stocks has become difficult to justify based on fundamental earnings. 

Clear earnings momentum resides with beneficiaries of the falling Australian dollar which peaked at US 81c at the beginning of the February half-year reporting season. Otherwise earnings momentum has been mixed coming into August, positively led by energy, staples and media but weighed down by negative momentum in telcos, consumer services and financial stocks. 

February reporting season showed companies are still unwilling to dial back dividend payout ratios or scale down buyback programs, despite a slowing in the growth of company profits. Dividends remain in focus for investors and a priority for corporates but often at the expense of capital expenditure. This adds to concerns about the degree to which many companies are under-investing to deliver cash to shareholders now at the expense of future growth. 

If elected, the Labor Party is proposing to repeal a concession that allows excess dividend imputation credits to be refunded. We think this proposal might prompt companies with large franking accounts to accelerate capital management initiatives such as paying special dividends. 

We think that avoiding the downside is as important as identifying the upside in the current market. It is therefore important to review your portfolio and ensure that you are comfortable with the companies that you hold. 

  • Justin Still  Investment Adviser (Authorised Representative: 000279726)  Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410 
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