MEDIA RELEASE The ASX was up strongly in February, indicating a positive investor reaction to reporting season, says Julian Beaumont, investor director with BAEP.
“The market mood was somewhat nervous leading into reporting season, with many fund managers perceiving significant earnings risk. Stirring these nerves, the few downgrades pre-announced before February were treated harshly, even when they only mildly disappointed.
“In aggregate, earnings for the full year were downgraded slightly, but only by a level considered typical of past reporting seasons.
“Earnings held up well enough and so stocks were able to gain nicely over the month.
“The consensus is concerned with the domestic economy, and particularly consumer-exposed sectors such as housing, retail and the banks. There were signs of this, though things seem to be getting worse. Management teams quite universally saw weakness ahead, even as some were reporting reasonably solid historic numbers.
“Management teams become all the more important in these uncertain times. For example, good retailers can still perform well even with general consumer weakness, and this season we saw good numbers again from the likes of JB Hi-Fi, Lovisa and City Chic.”
Mr Beaumont pointed out that the ASX is, however, more than just a play on the domestic economy.
“Many of the best performers in recent times are those exporting to, or operating, overseas. These include global tech companies, miners, and global consumer businesses such as Breville, IDP Education and A2 Milk.
“The tech sector has led the market in recent months, and it continued its charge through reporting season. The likes of Altium, Appen and Afterpay all took off, having talked up large growth opportunities. In an environment of slow growth, investors are willing to pay over the odds for disruptive and other structural growth stories.
“The big mining houses BHP and Rio Tinto are benefiting from higher pricing for the bulks, and the broader mining industry has evidently come back to life and is starting to invest again. This is starting to help out the mining services firms, with for example Seven Group’s strong form demanding fund managers’ attention.
“In contrast, some of the blue chips such as the banks, large supermarket operators, telecommunications companies and energy retailers disappointed. For them, increasing regulatory risks and tougher competition is adding to the weakening economic backdrop.
“Dividend payments were larger than expected this reporting season. Many companies decided to step up the percentage of earnings paid out, while special dividends were more prevalent than normal. These moves were likely motivated in part by the potential changes to franking rules.
“Of course, this largesse for shareholders means less invested back into business. And so we saw a return to our recent past, where dividends took preference over capex and other reinvestment. This might keep shareholders happy now, but inevitably comes with less growth in the future,” Mr Beaumont says.
“In this environment, and consistent with our philosophy, we favour high quality growth names. We’re particularly focused on those stocks with structural growth owing to strong industry growth, gains in market share, or new products or markets. Examples include CSL, Reliance Worldwide and Costa Group, which all sport quite reasonable valuations given their long term prospects.”