Rudi’s View: February Reports – Optimism Is Back

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 07 2020

Dear time-poor reader: early indications are investors are willing to adopt an optimistic view this reporting season

This is Part Two of this week's Weekly Insights, see also further below.

February Reports: Optimism Is Back

By Rudi Filapek-Vandyck, Editor FNArena

If Mr Market were a person of flesh and blood, he/she would have returned from the December holiday with a joyful spring in the step.

Expectations are 2020 will be a better year for global economic growth and for corporate profits after both trended down throughout calendar year 2019.

Extremely loose policies by central banks, including in Australia, the US and China, plus a reduction in geopolitical tension have laid the groundwork for a recovery later into 2020, so goes the narrative, and early economic signals are providing the necessary support for it.

This easily explains the unusual exuberance during the first weeks of January this year, until an unexpected coronavirus outbreak in China caused a pause in the uptrend.

Given the apparent validity behind this new narrative, and investors' willingness to get set six to nine months ahead, it seems unlikely the latest virus scare can fully derail the share market's newfound optimism. But investors will still be looking for as much confirmation as they can get along the way.

This is where the February reporting season fits in perfectly. Times have been tough for many a domestic-oriented retailer or cyclical company. Share prices are up (for most). Now investors want to receive some comfort from businesses their money is parked with the right people.

This set-up makes some experts uncomfortable, fearing too many businesses won't be able to deliver. And broad indices have only just touched at new all-time record highs. However, reading through copious amounts of previews and updates on ASX-listed corporates, I sense a general preparedness to look beyond the occasional niggle and short-term challenge.

Investor responses to early financial report releases have been encouraging: it's not the tangible evidence of the big turnaround we are all looking out for; we simply want enough comfort that things are starting to look up, and that management will be able to deliver.

An early update delivered by car parts manufacturer GUD Holdings ((GUD)) looks highly encouraging, indeed. Strictly taken, the six monthly financial performance missed analysts' expectations, but management was able to provide enough assurance that things are improving, and the next six months should make up for the initial "miss".

GUD Holdings shares have risen every day since reporting on February 2. Even though earnings forecasts have fallen slightly, the consensus target price has lifted to $11.95 from $10.72 on the day of reporting. Prior to that day, the shares had already recovered some 40% from the low point in August last year.

If the experience of GUD Holdings can be extrapolated over the remainder of February, the Australian share market is in for a treat, with plenty of positive vibes looking promising for the laggards in the market, those stocks the professionals like to label as "value stocks".

This by no means implies highly valued growth stocks automatically fall out of favour. The performance bar might be a tad higher, but that hasn't stopped many a structural growth performer from reaching fresh all-time highs. ResMed ((RMD)) is traditionally among the early reporters in Australia and its financial update was, yet again, better-than-expected. No reason to start worrying here.

The Big Dip Lays Behind Us

To understand the comfortable optimism with which investors are embracing this year's February reporting season, we must look back at what happened in August last year.

On many metrics, August 2019 marked the worst performance by corporate Australia post-GFC. Average profit growth for FY19 came out below zero. Aggregate dividends went backwards for only the second time in the decade. And if all that wasn't depressing enough, the subsequent banking reporting season saw Bank of Queensland ((BOQ)), National Australia Bank ((NAB)) and Westpac ((WBC)) all cut dividends for shareholders.

No surprise, the pendulum of share market momentum swung swiftly back to reliable, sustainable and predictable performers such as CSL ((CSL)), REA Group ((REA)), and Woolworths ((WOW)).

The Big Dip in the second half last year put the brakes on the broad market with the ASX200 only adding an additional 3% in total return on top of the circa 20% accumulated over the first six months. Underlying, trends and performances returned to their polarised divergence from 2018.

Then came the bushfires, and things were really not looking that rosy. In an ultra-rare occurrence, negative December didn't even allow for the traditional Santa rally leading into the new calendar year.

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