Rudi’s View: Coming Soon, The August Reporting Season

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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 | Jul 30 2020

In this week's Weekly Insights:

-Coming Soon: The August Reporting Season
-A Deeply Frustrated Fund Manager

Coming Soon: The August Reporting Season

By Rudi Filapek-Vandyck, Editor FNArena

On many accounts, the August reporting season about to be unleashed upon investors in Australia will mark a new low post-GFC, which ended 11 years ago.

This does not by default imply the Australian share market is ready for a big sell-off in the weeks to come.

Investors are being reminded markets do not compare in absolute numbers or values. Its all about matching what is forecast, what is priced in and what can ultimately be achieved.

Reporting seasons are mostly about changes to forecasts (and perceptions) rather than what companies have achieved.

Within this framework it remains an open question as to what conclusions exactly can be drawn from company financials and updates when macro developments remain all-important, and unpredictability of events and outcomes high.

We are less than 3.5 months away from the US presidential election, to name but one of the obvious obstacles to make far reaching predictions with any sense of conviction.

Companies will be reluctant to provide concrete guidance, but those who can/do will be rewarded for it.

Analysis of the five months since the pandemic spread teaches us that concrete guidance will be rewarded with share price outperformance.

Makes a lot of sense, if you think about it, as long as that guidance doesnt need to be withdrawn later.

Bad news is not necessarily the equivalent of a fatal blow, as also shown by energy producers and shopping mall owners pre-season. Large write-downs of assets had investors merely shrugging their shoulders: tell us something new!

We saw those write-downs coming from many miles away.

Investors are definitely looking forward, in many cases to FY22 which is not one but two years away, which means high tolerance for bad news in the short term, as long as it doesnt impact on FY22 estimates and derived valuations.

(This also shows, once again, why the macro picture remains the all-important denominator).

There is some anticipation that boards and management teams will grab the opportunity to clean balance sheets and get rid of a lot more baggage than otherwise would have been the case.

Again, this means: even more bad news will be thrown into the open.

Earnings estimates, on average, have been reduced by -15% and dividend cuts will be larger still, double the cuts in profits on some forecasts, which will make 2020 the worst year for income seekers in a long while.

Equally noteworthy: most forecasts assume no growth, on average, in FY21. A lot of weight is thus placed on recovery prospects by FY22.

****

Wat sets this year apart from past references is that the global pandemic created beneficiaries in the form of medical tests, ventilators, sanitisers, home entertainment and online shopping.

There were no obvious beneficiaries around when the Nasdaq bubble burst or when Lehman Bros went bankrupt.

Hence, more so than ever, this years August reporting season comes at a time of extreme share market divergence winners versus losers.

Whereas the losers might be enticed to spill the beans, throw out the kitchen sink, clean all the cupboards and create a springboard for future recovery and growth, no such leniency will be granted to companies whose share prices are trading near the all-time high.

Assessments will be made on a case-by-case basis.


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