Rudi's View | Jul 25 2019
Dear time-poor reader: this week I explain why global equity markets have been paying scant attention to corporate earnings, which doesn't mean August will be a complete waste of time.
Part Two (on Friday) contains an interesting piece of research on Australian banks, and further zooms in on the threats and risks from super-accommodative central bank policies and the ever rising mountain of global debt; and why there still is no inflation danger.
In this week's Weekly Insights (published in two parts):
-Corporate Earnings Still Matter In 2019
-Dividends, Quality And Australian Banks
-Central Banks' Policies Not Without Risks
-Charts: Mind The Output Gap, And Global Debt
-Rudi On Tour
Corporate Earnings Still Matter In 2019
By Rudi Filapek-Vandyck, Editor FNArena
In the share market all that matters are corporate profits and growth, or so the mantra goes.
But sometimes the direction for the share market is guided by a number of other catalysts, relegating corporate earnings to merely a secondary role. See the past twelve months as Exhibit A in support of that statement.
In August last year, investors were fretting about high valuations for Quality and Growth stocks, while bruised value-oriented funds managers were speculating whether their moment under the sun was -finally- about to arrive.
The 2018 August reporting season did not provide any clues about a profound and sustainable switch in market dynamics. If anything, stocks like CSL ((CSL)) and REA Group ((REA)) surged to new highs upon release of financial performances.
Once the reporting season was finished, investors' hope soon turned into despair as markets started a relentless downtrend for the final four months of the calendar year. That downtrend turned into a savage sell-off as year-end approached. Then Christmas came and put general anxiety on pause.
Next the Federal Reserve reversed its policy outlook -there would be no more tightening via Fed Funds Rate increases- and financial markets have rallied circa 20% over the following seven months.
In between, consensus forecasts for corporate profits have continued to fall, with one notable exception: iron ore miners. The Australian economy too is notably weaker than one year ago, now also pulling the RBA into stimulus action through two rate cuts this year, and ongoing promise of more to follow.
Bond yields the world around are significantly lower. US Treasuries are still flirting with an inverted yield curve whereby longer duration government debt carries a lower yield than short duration debt. In Australia, this year's August reporting season has been preceded by what seemed an unusually crowded period of profit warnings throughout April, May and June.
On some estimates no less than 250 ASX-listed entities have warned their shareholders they will not be able to meet prior guidance or promises.
And yet, the ASX200 is trading within a one day's rally of the late 2007 all-time high. In the absence of improving profit prospects (outside of iron ore), share market valuations have risen instead and are now back to multiples that bring back memories of late 2007. At least for those stocks and sectors that have fully participated in the 2019 bull market rally.
If, after reading the above paragraphs, you might feel inclined to conclude that corporate profit growth hasn't really mattered post August last year you are partially correct.