Springtime value for Australian equities

Australian Reporting Season Wrap 2019

26 September 2019

MCA Reporting Season Wrap 2019

Poor revisions by brokers and conservative outlooks from company management mask some of the positive signs and fundamental themes we’ve found in the results and through our engagements with both Boards and management.

Key points

Despite the ‘green shoots’ in consumer spending leading into the recent reporting season and company results being broadly in-line with expectations, the EPS revisions by brokers post-results had the worst ratio of downgrades to upgrades in over 10 years.

While it is understandable that the market had expected to see weak results due to the ongoing global uncertainty since the last reporting season, we believe that the market had expected to see a much more optimistic outlook going forward. Instead, management across the board talked about ‘air pockets’ in their outlook such, as low infrastructure spending and advertising, and they guided very conservatively for the periods ahead.

Poor revisions by brokers and conservative outlooks from company management mask some of the positive signs and fundamental themes we found in the results and through our engagements with both Boards and management. These are:

  • The consumer spending is better than expected
  • The housing market is stabilising
  • Funding environment is improving, but credit availability issues remain

However:

  • B2B demand is still weak due to lack of government stimulus for businesses
  • Business growth lagging from low housing starts and delays in infrastructure projects
  • Miners boosted by iron supply disruptions, but current high dividend payout ratios are unsustainable
  • Accounting chaos from AASB 15, 16 and 9 changes impacted many company results

Economic and financial indicators suggest a growing probability of a global recession. With Australia’s structural growth drivers of population and employment growth, we expect domestically-focussed Australian companies to perform relatively better than companies dependent on global growth or impacted by geo-political/macro issues. The overall outlook for the domestic economy remains relatively positive, and the fiscal and monetary stimulus will continue to flow through to consumption in 2019 and 2020. Any additional policy response or stabilisation of data will help lead a reversal of high Value spread. With these heightened Valuation dispersion opportunities within the Australian market, we are positioning our portfolios towards more these Value opportunities with strong fundamentals.

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In the full article (PDF), our team of Australian investment specialists, led by Reece Birtles, Martin Currie Australia's Chief Investment Officer, provide:

  • fundamental and analytical context to the recent company reporting season;
  • key fundamental themes from our engagements with both Boards and management;
  • analysis of the global and Australian economic and market environment; and
  • implications for investors in Australian equities from the burgeoning Value opportunity.

Australian Reporting Season Wrap - Download PDF