The latest batch of trading updates from key stocks shows more winners than losers
The reporting seasons has offered more surprises on the upside than the downside and that’s just the tonic for investors.
Judging from corporate updates, both internationally and locally, the general context has created a tricky framework for investors, as also yet again confirmed by Fletcher’s Building’s disappointing trading update on Monday.
It’s not as if management and shareholders look over their shoulders feeling lots of excitement, but on Monday Fletcher shares dived yet another 10 per cent for a total loss in capital since August 2021 in excess 60 per cent. The fact the New Zealand builder regularly pays out a dividend hardly compensates for the suffering endured.
Last week offered similar experiences.
We have had some disappointing trading updates from Sims, GrainCorp, Baby Bunting, Lindsay Australia and Tourism Holdings, among others.
Yet the impact on consensus profit forecasts in Australia has almost been negligible. That’s because for every disappointing market update there seems to be another one that manages to surprise on the upside. Think of REA Group, Orica and AGL Energy, but also Westpac and National Australia Bank, and others.
This operational reporting in Australia is about to hit the accelerator button with companies such ALS, Elders, James Hardie, Nufarm, TechnologyOne, Webjet and Xero, among others, before the end of the month.
Add in the fact that Australian companies are increasingly updating through quarterly trading updates and there’s a fair argument to be made that investors locally nowadays are subject to reporting seasons a la Wall Street.
Analysts and market strategists, here and in the US, nevertheless are of the view that things are looking better than previously forecast.
Earnings forecasts in the US have risen as a result of March quarterly corporate updates. The underlying picture in Australia remains more volatile, also because mining operations and agriculture businesses have been affected by bad weather, but so far it appears the balance is tilted towards more positives than negatives.
On Morgan Stanley’s assessment, consensus is still forecasting average EPS to fall for the ASX 200 by 6.8 per cent in the 2024 financial year, then to rise by 4.7 per cent and 4.6 per cent in FY25 and FY26. These numbers have only changed minimally in recent weeks.
While concerns over inflation, bond yields and delayed interest rate cuts, in combination with markets trading on above-average multiples, are dominating sentiment and financial news headlines, corporate updates have probably contributed to the cautiously optimistic tone that has returned post-April’s correction (if we can call it that).
Macquarie analysts have come to the same conclusion having witnessed 114 companies presenting and updating over three days the previous week (May 7-9) at the Macquarie Australia Conference.
Retail proved the standout negative surprise of this year’s conference, Macquarie analysts say, as market updates from the likes of JB Hi-Fi, Temple & Webster, Endeavour, Super Retail and Coles either implied market forecasts won’t be met or confirmed households are spending less or buying cheaper alternatives.
But net-net this year’s conference was positive, concludes Macquarie, with companies including AGL Energy, HMC Capital, AUB and Medibank Private lifting their guidance, while trading updates from the likes of PolyNovo, Pinnacle Investment Management and Regis Healthcare proved better than expected.
Macquarie’s forecast is for the net positive trend for Australian companies, that looks to have started in the last AGM season in late 2023, to continue into the August results season.
But ongoing daily evidence suggests there is plenty of room for disappointments, reflective of the polarised dynamics that characterise the global economic picture.
As far as the outlook for the sharemarket goes, I am still siding with the optimists, as I have since October last year, though I also believe investors should be prepared for a lot more volatility.
Anticipating exactly where the next corporate disappointment might come from is a mug’s game, so it’s probably best that portfolios have exposure to companies that should perform well in the medium to longer term, irrespective of the potential for an unexpected short-term setback.
One last thing: Longview Economics has observed something’s happening that hasn’t been seen for quite a while: the S&P 500 index and the equal-weighted S&P 500 index are pretty much moving at a similar pace this year.
In years prior, led by the Magnificent Seven and a small cohort of GLP-1 and AI beneficiaries, the equal-weighted index has significantly underperformed. Longview suggests this year there is a new phase in the equities uptrend, one that is no longer singularly dependent on a small group of extraordinary achievers only. In other words: the uptrend is broadening. It’s time for the rest of the market, for the laggards to catch up.
Rudi Filapek-Vandyck is editor of sharemarket research service FN Arena
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