Supply chain woes to dominate ‘tricky’ earnings season, fund managers say

Fund managers are bracing for a reporting season dominated by supply chain and inflation woes, with earnings growth set to slow and consumer stocks most in focus.

Supply chain challenges will dominate earning season, fund managers say. Picture: NCA NewsWire/Gaye Gerard

Fund managers are bracing for a reporting season dominated by supply chain and inflation woes, with earnings growth to slow and consumer stocks most in focus.

But there is a silver lining – the chance to go bargain hunting, after a volatile January shaved 8 per cent off the index.

For stockpickers like Bradley King of Armytage Private, macro issues will be impossible to ignore this season. “We usually focus on more bottom-up investing but there’s plenty of macro headwinds coming, so that’s something to keep in mind this year,” Mr King said. “Coming into reporting season, what we’re looking to see is whether companies, regardless of the industry, have got enough stuff to sell, and can sell it in a cost-effective way.”

Supply chain challenges have dogged many industries for the past year and are dragging on longer than most expected.

It was still the major headwind for the majority of companies, Mr Armytage said. “Look at Ansell’s result. That was basically a car crash on the (earnings) side, but sales were OK. And ResMed, they’re hiring planes to move stuff around and even though their competitor is pretty much self-combusting, they still can’t get the kit in to take advantage of it … I think we’re going to see more of that kind of thing going forward.”

Ansell shares closed 14 per cent lower on Monday after the glove and protective clothing maker slashed its annual earnings guidance by 25 per cent, with demand for its products slowing faster than expected while supply chain disruptions crunched margins.

After so much time spent on scale and building manufacturing efficiency, companies were starting to look at descaling just to make sure they had some product to sell, Mr Armytage added.

Tribeca Investment Partners portfolio manager Jun Bei Liu expects to see earnings growth this season but is tipping it will slow from recent years.

“The biggest challenge for this earnings season is really going to be the cost of doing business,” Ms Liu told The Australian.

“The supply chain disruption is going to be severe. Companies first started talking about this issue 12 months ago, and many of us thought the disruption should be gone by now but on the contrary, it’s actually gotten worse because labour shortages are so severe. And so the cost of doing business is increasing.”

The supply chain issues will persist for another six months or so and consumer-facing stocks will shy away from any guidance in the coming weeks, she predicts.

Cyan Investment Management principal Dean Fergie said it would be a “tricky” reporting season this time around.

“Consumer behaviour was pretty weak coming into December, and a few companies really struggled with supply chain issues,” he said.

“Certainly the commentary going forward won’t be overly positive in light of rising interest rates and continued uncertainty, and the fact that we’re just not seeing that opened-up economy, back-to-normal behaviour yet.”

Mr Fergie is tipping the supply chain challenges will remain through most of 2022, based on commentary from companies.  Even with these challenges, Redpoint Investment Management chief investment officer Max Cappetta predicted a strong overall dividend harvest in the coming weeks.

But investors needed to look beyond high-yielding names and search instead for companies with dividend growth potential.

“We are expecting approximately 130 dividend announcements across the ASX200 in the months of February and March 2022 and it will be a mixed bag. It is important to look across the entire market – and capture income across all sectors and yields – because there will always be winners and losers within each of these groups,” Mr Cappetta said.

“The mining sector was responsible for carrying the ASX 200 to a record aggregate dividend payment year in 2021 and remains well placed to provide solid cashflows again in 2022, supported by more accommodative policy in China. However, there are many opportunities in the metals of tomorrow, such as copper and lithium, and Australia has some great companies with great assets already in production around the globe.”

Consumer-facing companies will be the ones to watch in the coming weeks for more insight on demand and supply chains, according to the fund managers.

“The economy bellwethers, the big consumer companies like Kogan, JB Hi-Fi and Harvey Norman, they’ll give a really good overview of how consumer behaviour is travelling,” Mr Fergie said.

“And some of the smaller logistics companies, Qube and Silk Logistics, will be good to see in terms of getting rhetoric as to the ongoing supply chain issues, how much freight is travelling around.”

Mr Fergie is avoiding buying into consumer stocks and commercial real estate given the current headwinds, but does see room for bargain hunting in other sectors following the recent sharemarket volatility.

Ms Liu will also watch the tech sector closely and expects to see dramatic share price reactions if these Covid winners don’t deliver to investors’ expectations.

“Still, I think the market looks well priced heading into the reporting season. And if anything it actually removes a lot of volatility and risk and for some of those companies, because share prices have come down so far,” she said.

“So it’s a good time to be picking up some companies, but investors should just be really mindful of earnings: if companies miss expectations then certainly investors have proven they’re not very patient in today’s world.”