The dichotomy in the Australian Market

Australian Reporting Season Wrap

10 September 2018

MCA Reporting Season Wrap 2018

There is a clear dichotomy in the Australian market, split between disdain for increased investment spend amongst stable, profitable companies, but reward for high P/E stocks doing the same thing.

2018 Reporting Season

The Australian reporting seasons (in February and August) are normally important periods for markets, with much more fundamental company information available than at other times in the year. But this season, the market has again largely overlooked fundamentals, instead rewarding stocks with high price/earnings ratios (P/E) often regardless of lacklustre earnings.

Despite the positive economic backdrop, revenue environment and underlying fundamentals of Australian companies, disappointingly, EPS revisions post-result have had the worst negative skew in 10 years.

There appears to be no strong macro or sectorial theme to explain the direction of EPS revisions, but the nature of the earnings revisions is quite clear – cost pressures and falling margins. We are now seeing a margin squeeze, operating expenditure and capital expenditure is increasing after years of restraint and cost cutting.

There is a clear dichotomy in the Australian market, split between disdain for increased investment spend amongst stable, profitable companies, but reward for high P/E stocks doing the same thing – even through increased investment should result in better bottom-line growth in the long run for both sets of companies.

We see the disconnect in P/E re-rate as the biggest driver of performance over the reporting season. This situation has left high P/E stocks looking their most expensive in 15 years. The only reason Value spreads are not even wider is that low P/E stocks are not as cheap as they were back in 2009.

We see the disconnect in P/E re-rate as the biggest driver of performance over the reporting season.

Australia Reporting Season Wrap 2018

In the full article (PDF), our team of Australian investment specialists, led by Reece Birtles, Martin Currie Australia's Chief Investment Officer, provide a fundamental context to the recent company reporting season and what this means for value investors.

Australian Reporting Season Wrap - Download PDF