Rudi's View | Feb 21 2018
In this week's Weekly Insights (published in one part this week):
-Reporting Season, And A Warning
-No Weekly Insights Next Week
-Index Changes (Vol 2)
-When Two Tribes Go To War
By Rudi Filapek-Vandyck, Editor FNArena
Reporting Season, And A Warning
We are past the mid point of the month, but we've only seen the tip of the iceberg that is local reporting season in February.
As I write today's update, less than 100 companies covered by the eight stockbrokers in the FNArena universe have updated and triggered an analyst response so far. By early March that total will have surged past 300.
With the bulk of companies still in the queue, among them many market darlings and large cap, blue chip names, it's dangerous to try to identify solid trends. History shows the dominant narrative for this reporting season can still make a decisive turn from here, and it probably will.
Finding this year's narrative is not made any easier for investors with strong macro stories impacting on a daily basis, ranging from Chinese holidays, to American protectionism, to US bond yields and fear of inflation, not to mention derivatives uncertainty.
At micro level, there is one observation that stands out: the general optimism that had characterised local previews in January has noticeably disappeared with the opening weeks of February delivering a rather mixed bag, not the bias towards strong performances that was expected.
The status operandi so far is probably best illustrated through the percentages in beats and misses recorded to date. While 35% of companies beating expectations is near the highest level recorded by FNArena, so is the near 30% in misses. It's a polarised market with companies operating in multi-speed segments of both the local and offshore economies, to say the least, on top of ongoing disruption and technology evolutions taking place.
Before I move on to one particular potential reason behind the share market's bifurcation, let's have a quick look at what some of the other experts have to say.
Market strategists at Citi believe underlying the trend remains positive, albeit skewed towards specific sectors that are enjoying better operational dynamics. Outside of resources, such sectors would seem to include diversified financials, energy utilities, medical products and infrastructure exposures.
Think companies including Macquarie Group ((MQG)), Computershare ((CPU)), ResMed ((RMD)) and CSL ((CSL)).
Sectors gripped by headwinds include banking, telecommunication, and retailing.
All in all, Citi observes average growth projections are rising; mostly with resources companies in the drivers seat. Irrespective, on Citi's observation, upgrades and downgrades to FY18 profit estimates have to date remained relatively equal.
What most pleases Citi strategists is the absence of major calamities and full-on disaster announcements; this is in-line with an overall quiet confession season beforehand.
Market strategists at Credit Suisse are among the most bullish in the market, and they make sure their analyses find their way to Fairfax journalists, hence why the initial assessment in the Australian Financial Review tends to have an equally bullish undertone.
Regardless, Credit Suisse finds overall statistics to date have been skewed unfairly by just a few bad apples, identified as CommBank ((CBA)), Fletcher Building ((FBU)), and Wesfarmers ((WES)). This explains the title above their preliminary update: Not as shabby as it first seems.
Dividends and new buybacks are surprising to the upside, considered evidence of a "solid underlying tone" for Australian companies. Upgrades to growth expectations continue to underperform those in the past, but for CS strategists this implies FY19 forecasts are probably due a catch-up.
And whereas rising business investment proved the outstanding feature of last year's August reporting season, this year's upgrades are less eye-catching, acknowledge the strategists, plus they are more concentrated inside commodities.
What needs to be taken into account is that most strategists assess results and outcomes in line with stocks covered by that particular stockbroker. The combination JPMorgan/Ord Minnett covers more smaller caps, which might explain why their intermediate assessment is putting the emphasis on the large number of "misses"; on Ord Minnett's counting no less than 43% of companies having reported by last week had failed to meet expectations.
IT and industrials take the honours on the positive side, according to the broker, while consumer discretionary shines on the dark side.
Ord Minnett also observes many weaker-than-expected growth achievements stem from offshore growth companies, with CSL highlighted as one major exception.
In case anyone still has to catch up on the newest addition to the FNArena website; we now operate a permanent, whole-year-around Results Reporting Monitor for Australian companies featuring in excess of 400 companies covered by eight major stockbrokerages.
In February, this Monitor is updated daily with delayed access for non-paying members: https://www.fnarena.com/index.php/reporting_season/
Given we monitor eight stock universes against consensus projections with an intelligent human approach, we might just be providing the most accurate market wide assessment that is available.