Will economic uncertainty overshadow the company reporting season?

Will economic uncertainty overshadow the company reporting season?

February marks the start of company reporting season in Australia. This is an important period for the market, with much more fundamental company information available than at other times in the year.

Leading in to this period, it feels like economic uncertainty globally may be overshadowing the more positive company profit fundamentals that we can see.

Global uncertainty driving weaker earnings forecasts

World economic data, such as PMI and consensus expectations for world profit growth, have slumped over the last six months on trade war concerns, Fed rate rises and the US government shutdown.

As a result of this global economic uncertainty, revisions to Australia company consensus earnings per shares (EPS) forecasts by broker analysts have been particularly weak over the past few months.

Cross section variance* of earnings revisions

Cross section variance of earnings revisions

Past performance is not a guide to future returns.
Source: Martin Currie Australia, Factset; as of 21 January 2019.
Calculated using the weighted average of broker consensus forecasts of each holding – because of this, the returns quoted are estimated figures and are therefore not guaranteed.
*Cross section variance: standard deviation of the change in revisions/price across stocks in the market

However, we see that these revisions reflect a lower confidence in global economic growth, rather than and any real issues with the underlying fundamentals driving company profits in Australia.

Business confidence supportive

In fact, actual business conditions don’t appear to reflect the weak EPS revisions.

The NAB monthly business survey, released in December, showed that while current conditions have softened from mid-year, business conditions in 2018 were the strongest in the last 10 years.

Business capacity utilisation also remains high, and companies have demonstrated confidence by continuing to spend on capex and hire more staff.

Consumer confidence holding up

On the consumer side, confidence is still apparent. The Westpac Melbourne Institute Index of Consumer Sentiment rose in its December release, marking a full year in which the index was above 100 for the first time in five years.

Consumer spending data through November also points to good non-discretionary (supermarket) performance but a continued soft discretionary spend.

Housing activity and price outlooks are likely to be soft given constrained credit conditions, which is also increasing the need for better wages growth to offset weak savings.

Opportunities in the disconnect

Such times of market disconnect from fundamental profit drivers can offer significant investment opportunities for our research-driven stock-picking capabilities.

We think that consumer confidence will flow through to profits for companies that are leveraged to the consumer, and we see opportunities in consumer staples, strongly positioned consumer discretionary and energy stocks.

We also expect government infrastructure spending to continue to be strong, supporting profits for real asset companies.

Such times of market disconnect from fundamental profit drivers can offer significant investment opportunities for our research-driven stock-picking capabilities.

Commodity prices are holding up well, despite the weak China growth data (because of Chinese steel production), but we do believe weaker revenue and profit growth in the resources space may suppress the overall market-growth figures.

Focus on the fundamentals

As the month unfolds, and companies begin to report their earnings, our analysts will conduct over 100 meetings with management teams.

We look forward to seeing company-reported results surprise on the upside relative to the negative consensus expectations leading in, and for our more bullish outlook to prevail.

Important information

Past performance is not a guide to future returns.
The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.

Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice. The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.