The reporting season for ASX-listed companies which has started this month is shaping up as the most intriguing – and important – since the global financial crisis. Will sentiment and noise overshadow fundamental strength?
Well known for his published analyses of the reporting by Australian companies and their pre-and-post reporting performance, Reece Birtles, the CIO of Martin Currie Australia, believes that economic uncertainty may be overshadowing more-positive company profit fundamentals.
In a briefing note for clients last week Birtles says that world economic data have slumped over the past six months off the back of a trade war concerns, US interest rate rise possibilities and the recent US Government “shutdown”. Australian broker revisions have followed suit.
But Birtles says: “However, we see that these revisions reflect a lower confidence in global economic growth rather than any real issues with underlying fundamentals driving company profits in Australia. In fact, actual business conditions don’t appear to reflect the weak EPS revisions.”
He says that, with such a market “disconnect”, there are invariably opportunities. Three examples are:
- “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, and
- “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.”
He could have added that the seemingly never-ending crisis unfolding with the banks and other big financial institutions, an upcoming Federal and NSW election and falling house prices have added to the local pessimism.
Nevertheless, he says: “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.”