Weekly Equities Note
Written and accurate as at: Mar 08, 2017 Current Stats & Facts
The reporting season ended with a damp squib in terms of market performance with the ASX 300 down -0.2% for the week. Macro effects dominated performance, mostly overshadowing stock-specific effects, as has been the case right through reporting season. February saw a reversal of the trend of cyclicals outperforming rate-sensitives, which has been the case since August last year, as US bond yields fell following several months of gains. This was driven partly by some action in the European market, where German bund yields have fallen as investors seek a safe haven ahead of French elections, widening their traditional yield discount to US Treasuries and prompting some rotation into the latter.
At the same time, fears emerged that the momentum of global growth may start to slow, which also saw a reversal in the bond yield decline. This was perhaps a natural reaction as the market’s euphoria over the possible growth-friendly aspects of a Trump presidential agenda began to fade. Nevertheless, there was little in the data to suggest such a trend. It is important to understand that there were concrete signs of improved growth prior to President Trump’s surprise victory, supported by a broad cross-section of data. There have been several other periods of improvement in the US economy post-GFC, however signs that US household balance sheets had healed since the GFC, as well as a normalisation of wage growth, suggests that consumer confidence can help sustain this recovery. While the Trump administration’s policies could strengthen this improvement, it is not dependent upon it.
The irony of all this is that resources, having delivered a stellar set of results, underperformed the market; down -1.4% last week and over -3% for the month (versus a +2.2% gain for the ASX 300). The A-REIT index, on the other hand gained 0.4% for the week and 4.2% for the month.
Reporting season as a whole did display some constructive trends. The number of companies experiencing earnings upgrades (22%) and downgrades (32%) was broadly in-line with historical averages. However the scale of upgrades was greater than usual; in aggregate, ASX 200 FY17 EPS expectations were upgraded by 1.6%. Doesn’t sound like much, but when placed in the context of a long-term average -0.9% downgrade of expectations during a reporting season, it becomes more significant. This is the first earnings upgrade in a reporting season since February 2014 (+0.6%) and the largest since August 2010 (+2.6%). As a result, earnings expectations for FY17 have strengthened over the last 18 months – again, a historical oddity – and now stand at 17%. If achieved, it would be the first year of earnings growth since FY14.
The caveat to all this good news is, of course, that it is almost all driven by resources, which have seen already high earnings expectations upgraded by a further 7%. The surge in commodity prices, coupled with the capex reductions and cost control of recent years, has created an operational leverage that is driving strong earnings growth and cash flow.
Outside of resources, the market continues to subdued economic growth and the ongoing challenge of disruption from technology, regulation and globalisation. Revenue growth remains muted as a result. That said, one of the key takeaways from reporting season was that the industrials (ie. the market ex-resources) saw earnings stabilise and largely meet expectations. There was dispersion beneath the headline numbers, of course. Companies that beat expectations, such as Commonwealth Bank (CBA) and Qantas (QAN) managed to do so through strong cost discipline, offsetting sluggish sales. On the other hand, there were signs that the market is seeing through lower quality results, less likely to give the benefit of the doubt to companies which may have decent headline growth but poor cash flow or rising capital intensity.
Looking forward, liquidity continues to support equity markets and valuations look reasonable, especially given the improvement in earnings. Continued signs of improved global economic growth could see inflation pick up, which could support further rotation away from bond-sensitives and towards cyclicals within the market. Some companies are showing signs of a credible response to persistent disruptive threats. The upshot is that stock selection remains crucial.
This document has been preparedby BT Investment Management (Fund Services) Limited (BTIM) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at 06 March 2017. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This document is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this document may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this document is complete and correct, to the maximum extent permitted by law neither BTIM nor any company in the BTIM Group accepts any responsibility or liability for the accuracy or completeness of this information. BT® is a registered trade mark of BT Financial Group Pty Ltd and is used under licence