Few clues in reporting season on market recovery

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August 25, 2020
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MEDIA RELEASE: While the market appears to be pricing in a recovery in the next year or two, the overriding theme from reporting season was one of ongoing caution and uncertainty, said Hamish Tadgell, portfolio manager at SG Hiscock & Company.

“Perhaps unsurprisingly, the message by almost all companies during reporting season was that no-one knows what the future looks like.

“Yet when we look at the data on earnings per share, it is still forecasting a recovery in 2021. We think this is probably somewhat optimistic – after all, it historically takes, on average, three years for the market to return to its previous peak earnings level following a downturn. While we recognise this is an event-driven crisis rather than a structural or cyclical recession, and governments have injected massive stimulus, we would be surprised if things return to normal quickly given the economic challenges and dislocation.“

“Even those who have been beneficiaries of the COVID-related restrictions and lockdowns – such as home improvement and home cooking companies – pointed out the recent levels of growth would probably start to come back in the next quarter or two.

“In a very difficult and challenging environment, reporting season has also highlighted the more resilient business models and seen a flight to quality and known brands. Companies with multichannel capability who have been able to capitalise on the surge in on-line demand and are agile and responsive have taken market share and benefited significantly,” Mr Tadgell said.

He said reporting season has highlighted the extreme dispersion between those companies that are surviving – and even thriving – in the current situation, and those that are doing it tough.

“In many ways, reporting season has told us very little about company prospects for the year ahead. Guidance was rare, and guidance for growth even rarer, with results driven more by macro policy and positioning rather than necessarily fundamentals.

“However, for active investors, there have been some good opportunities in those companies benefiting from the ‘stay at home’ trend, the stimulus packages and the low interest rates. These include electronics and furniture companies that can participate in the shift to working-from-home and home-schooling, as well as food delivery and grocery companies.

“On the other hand, companies in the “out and about” category – such as travel and hospitality and retail shopping centres have been impacted by social distancing and isolation restrictions.

“There will be some mean reversion when the economy starts to open up, but this will be very dependent on how long we have to live with virus and how things open up.”

Mr Tadgell added any optimism about a recovery will be well and truly tested in coming months.

“We are currently seeing a tug-of-war between economic support versus economic reality.

“The massive government stimulus channelled through initiatives such as JobKeeper and JobSeeker, as well as loan and repayment holidays, is suppressing real unemployment and insolvency levels but, as the stimulus fades, it seems likely these levels will rise.

“A key question is whether policy will outlast the pandemic. The economy is currently on life support but what will happen if this is withdrawn – and is it even feasible that it will be withdrawn?

“Economist Milton Friedman once said ‘nothing is so permanent as a temporary government program’, and this was certainly borne out by the quantitative easing programs introduced during the global financial crisis, which have since become embedded for fear if they are unwound it will severely upset markets and economies . We may well find the same is true during this crisis,” he said.