Rudi's View | Aug 22 2019
Dear time-poor reader: early beats and misses from corporate results, plus an update on global dividends.
In this week's Weekly Insights:
-Value & Growth, The Debate That Never Ceases
-August Reporting Season: Early Signals
-Rudi On Tour
By Rudi Filapek-Vandyck, Editor FNArena
Value & Growth, The Debate That Never Ceases
Value investing is dead. Can I quote you on such?
The question recently was thrown at me via an avid podcaster & blogger. While rather amusing, I wasn't quite happy that such a controversial quote would be published with my name attached to it.
Because, slight detail, it isn't quite what I have been writing about all these years. So the invitation followed to provide a more accurate quote, upon which I wrote a few paragraphs. That then proved too much information for what was intended.
Long story short. I wrote the paragraphs below, from which a tiny amount was used in the blog. I think too many value investors get way too prickly when someone (as in myself) points out the obvious.
To set the record straight, here are my paragraphs:
"The debate about Value versus Growth style of investing seems to have made a decisive swing in favour of the latter in recent years with US data signalling Growth has now performed (decisively) better than Value in each of the past eleven years. In Australia a similar trend has established itself since early 2013.
The past 18 months in particular have proven too much of a challenge for many a typical Value investor. In response, many are pointing fingers towards easy money policies by the world's central bankers, or towards exceptionally low bond yields, and investors falling in love with modern day disruptors.
In my view, it is too easy to blame all of these factors. On my observation, many a typical Value investor has completely ignored the seismic changes taking place across the globe post GFC. These changes are not only highlighting the impact from disruptors, they are equally creating structural challenges for many of the companies whose shares today trade on cheap valuations.
This, I believe, is the real story behind the Value versus Growth debate. Grown up, intelligent and experienced men ignoring or refusing to accept that the world, yes indeed, has changed profoundly, and will continue changing for a lot longer."
Here is the blog: https://qavpodcast.com.au/2019/08/15/is-value-investing-really-dead/
I have suggested I am available for an intelligent, well-researched and educated discussion about why Value investing hasn't worked out well for many investors in recent years, including many professional funds managers.
August Reporting Season: Early Signals
FNArena only started to produce detailed coverage of Australian corporate results in August 2013. In the six years since we haven't monitored one season yet in which released financial performances consist of more "misses" than "beats", but early indications are this August reporting season can possibly turn into "the one".
Having updated on exactly 80 corporate releases on Monday, 19th August 2019, the tally currently stands at 33.8% "misses" (27 reports) against 21.3% "beats" (17 reports) and the remaining 36 reports or 45% in-line.
Of course, there is no real need to get overly downbeat just yet. This is by all accounts still but a relatively small sample. In two weeks' time our daily updated Corporate Results Monitor will contain assessments on 300+ corporate releases, but history suggests it's usually at the end when the real nasties come out while at the beginning of the season, profit warnings not included, the news usually carries a more positive bias.
Not this year, or so it seems. Unless, of course, this is the good news. Let's hope not.
The worst seasons on FNArena's record thus far had both "misses" and "beats" on equal footing. Similar to the US, corporate reporting usually generates more "beats", thus when the numbers end up being equal we all know life for corporate Australia is really, really tough.
Those two seasons were August 2017 and February this year. The latter has also been followed up by an equally "balanced" out-of-season period of lacklustre financial reports, including what might have been one of the busiest seasons for corporate confessions (profit warnings galore). No need to look any further as to why the RBA is cutting interest rates; and why that's exactly what it should be doing.
Quality Retains Its Value
There is no end in sight for the corporate earnings recession in Australia. Early signals thus far are firmly suggesting overall it's not getting better; corporate Australia needs all the support it can muster, with a watchful eye on the multiple international uncertainties.
Not everyone is suffering equally. Observation number one remains the Australian share market continues to be sharply divided between the Haves and the Have Nots; high quality versus low quality, structural growth with a defendable moat versus much weaker and vulnerable business models.
As such we have witnessed, once again, how financial performances from companies including REA Group ((REA)), ResMed ((RMD)), CSL ((CSL)) and Cochlear ((COH)) are holding up reasonably well, and so far these companies' share prices have been rewarded for it.
A similar observation applies to companies such as JB Hi-Fi ((JBH)), Baby Bunting ((BBN)) and Super Retail ((SUL)), operating under maximum stress in a retail sector that is facing multiple challenges, all at once. Here, we can also throw in Smartgroup ((SIQ)), Credit Corp ((CCP)) , Magellan Financial Group ((MFG)) and Treasury Wine Estates ((TWE)); all are proving their mettle when others are faltering.
Plenty Of Vulnerabilities On Show
On the other hand, some of the businesses that had been regarded relatively resilient up until this August reporting season have shown more vulnerability instead and they are being punished for it, including the likes of Orora ((ORA)) and GUD Holdings ((GUD)). One other surprising disappointment was delivered by Cleanaway Waste Management ((CWY)).
Weak performances are thus far what binds together most financials, be they insurers (Suncorp, Insurance Australia Group), financial services providers (Computershare, Challenger), wealth managers (Janus Henderson), small banks (CYBG, Bendigo and Adelaide Bank) or Australia's highest quality lender (CommBank); all updated with soft performances, at best not disappointing too much to the downside, or trying to placate investors with a higher dividend.
Even the resources companies report card thus far looks rather mixed with Rio Tinto ((RIO)) also feeling the need to compensate for slight disappointment with a higher dividend but with Woodside Petroleum ((WPL)) disappointing on both accounts. Both Whitehaven Coal and Coronado Global Resources ((CRN)) performed well but remain beholden to whatever happens to the price of coal.
Observation number two is that FY19 report card driven share price volatility can be quite extreme, as has been the case in all reporting seasons in recent years. Probably the most puzzling sell-off followed a much better-than-guided performance by Jumbo Interactive ((JIN)). Post event weakness might be related to one large seller who's keen to abandon its holding, in which case a recovery most likely will follow once the majority of stock has been offloaded.
Both Blackmores ((BKL)) and Pact Group ((PGH)) are likely to feature on the list of most prominent failures this season, together with AMP ((AMP)). All three have repeatedly proven in recent years that a falling share price does not by definition represent an opportunity for bottom-dwelling investors, and that story has simply continued into this month.
JP Morgan Finds August Challenging And Puzzling
Equity strategists at JP Morgan point out while star performers such as JB Hi-Fi are managing to withstand the pressure from "recessionary" conditions for Australian retailers, in reference to a description used by the South African owners of David Jones, there is no such escaping the retail blues for landlords including GPT ((GPT)) and Vicinity Centres ((VCX)).
JP Morgan has found the opening gambit to the August reporting season "puzzling", providing "little clear direction on the state of the economy". The strategists note similarly mixed messages from companies exposed to the local housing cycle, while demand for credit overall seems to be subdued, still.
One thing stands out: JB Hi-Fi is most likely to surprise to the upside when it reports financials. JP Morgan has six years and twelve reporting seasons to back up that observation. Something to keep in mind for next February, maybe?
JP Morgan goes as far as call August an "unhappy hunting ground for Australian equity investors" and notes the month has seen only one positive performance in the past six reporting seasons. Similar as with FNArena's observations, JP Morgan's stats equally show more misses than beats, but also with only a tiny group of companies forcing analysts to revise forecasts upwards. Healthcare is the standout sector so far.
Coincidentally, that one positive August season was last year when healthcare stocks, led by a 15% rally in CSL shares, were equally among the standouts.
Dividends Still Growing
Elsewhere, Janus Henderson reports the more challenging context for companies globally is having an impact on global dividends. On its numbers, total dividend payouts reached a new all-time record in Q2 of US$513.8bn, but this only marks an increase of 1.1% compared to a year ago (when dividends were growing at 14%+). The rate of growth is slowing noticeably, though this is also due to the impact from a stronger USD.
Janus Henderson had already anticipated a slowing pace of growth in total dividend payouts, with Europe in particular lagging the rest of the world. Janus Henderson's dividend index for the continent is at its lowest level in over a year. Australia remains inside a five-year long trend of stagnant dividend growth with QBE Insurance ((QBE)) the only bright spot locally ahead of August reporting.
For 2019 as a whole, Janus Henderson is forecasting 4.2% growth in dividends to a total payout of US$1.43trn, equal to 5.5% growth underlying; in line with the long term trend.
FNArena continues to updating daily during this reporting season: https://www.fnarena.com/index.php/reporting_season/
Audio interview about the August reporting season from Wednesday last week:
Rudi On Tour In 2019
-AIA and ASA, Perth, WA, October 1
-ASA Hunter Region, near Newcastle, May 25
(This story was written on Monday 19th August 2019. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. There will be no Part Two this week).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: email@example.com or via the direct messaging system on the website).
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(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)