Feature Stories | Mar 21 2022
A compilation of stories relating to the August 2021 corporate reporting season in Australia, including FNArena’s final balance for the season.
Content (in chronological order of publication):
-Risks To Consider
-February Looks Tricky
-February Results: Macro, Traps And Opportunities
-February Reporting Season – Predictions & Forecasts
-More Beats Than Misses
-Too Many Distractions From Corporate Results
-Conviction Calls & Post-Reporting Season Notes
-Conviction Calls & (More) Post-Reporting Season Notes
By Rudi Filapek-Vandyck, Editor FNArena
Risks To Consider
Let's start with the good news. Historical data analysis suggests the final week of January and the first ten trading days into February usually represent a positive experience for the Australian share market.
Data analysis conducted by Hawkeye Analytics grants this period a "win"-rate of 17 from 22 periods.
The not so great news is history is not by definition a reliable guide. Being 'long' the ASX200 didn't work out well in 2016 and 2018, the two years that come immediately to my mind as recent examples of when equities started a new calendar year with lots of doubt and sell-orders.
Believe it or not, it wasn't such a great period in 2021 either, and that turned out a surprisingly good year for equity investors.
Twenty years ago or so one of the most popular sayings on Wall Street and in and around the ASX building on Sydney's Bridge Street was "so goes January, so goes the rest of the year". We've seen too many concrete examples since that have debunked that popular market myth.
You'd never hear it repeated in the years that started off on a sour note anyway. And some of those years delivered some of the big turnarounds that would offer oversized gains for those portfolios that were 'in' the market instead of on the sideline. Think 2016, but also 2009.
Let's face it, the only reliable conclusion we can draw from the dismal performance of share markets in the opening three weeks of January is that investors have had a re-think about valuations, risks and what can possibly lay ahead.
January is usually a positive month, which is why we can Google the "January-effect", and it is part of the November-April most profitable seasonal period for markets in many calendar years (but not always).
So let's have a look at what is weighing on markets' mind this early in 2022.
Putin and Ukraine, China and Taiwan
For the first time in a long while, a military conflict involving today's greater powers in opposing camps has become a genuine possibility.
Nobody really knows what Putin's real plan is. Does he want to test the West's resolve? Is he looking for longer-term bargaining power?
The real scary prospect is that Russia and China, behind the scenes, might be conspiring towards a New World Order. Beijing and Moscow might have coordinated intentions.
Imagine for a few moments the impact of Russia invading the Ukraine and China not much later employing its military might to annex Taiwan.
I don't want to scare the bejeezus out of you all, and let's hope such scenarios never materialise, but let's not be overly naive about this either. Moscow definitely can bring bad news over us all.
Inflation, Central Banks, And Bond Yields
It appears that what set off share market weakness in the US is a general shift in inflation expectations.
Most forecasters still remain of the view that nominal inflation is about to peak, and it should decline throughout the rest of this calendar year, but there's no disagreement that risks are rising and with omicron and supply chains disruption ready to stick around for longer, there is now a general sense that central bankers are getting more and more uncomfortable.
Hence, bond markets are now pricing in more rate hikes and sooner than late last year, while the December FOMC minutes revealed the Federal Reserve is thinking about shrinking its massive balance sheet; Quantitative Tightening as opposed to Quantitative Easing.
Markets have felt extremely comfortable while ample liquidity support was being provided by supportive central banks, but the removal of this support was always going to inject doubt and insecurity into the general mindset. What if excessive liquidity's impact has been underestimated in recent years?
What goes up must come down?
The added complication is that inflation has very much become a political feature in the US where president Biden's low approval rating has been directly linked to household budgets shrinking because of 7% nominal inflation.
Now take into account that inflation caused by workers being sick and in isolation cannot be solved through higher interest rates, and it should be clear central banks are facing a real conundrum.
That potential predicament can potentially become a lot more challenging as more and more analysts are forecasting a continued rise in the price of fossil fuels. Morgan Stanley has become the latest to forecast Brent oil priced at US$100/bbl later this year. Surely those who have been envisaging a rerun of the 1970s must be smiling.
Be careful what you wish for. The 1970s was one of the most challenging decades for equity markets.
Markets remain heavily polarised with new economy stocks and dependable over-achievers trading on above-average valuations and old economy stocks and cyclicals on much cheaper multiples. Thus a lot of pain gets inflicted whenever market momentum makes a decisive shift into the less popular 'value' stocks.
This latest momentum reversal effectively started in December. Just ask the fund manager whose portfolio filled with technology and biotech stocks plunged more than -12% throughout the month, and I think it's pretty much a given that January has continued the pain.
Extremely over-crowded market positioning is co-responsible as investors like to congregate in winning trades up until the point whereby the uptrend is no more and everybody heads for the exit.
Higher bond yields are always a negative for higher-valued, longer-dated, well-run businesses, at least in the short-term. And bond yields have further to climb if inflation stays high for longer. Some bond experts have expressed the view that bond yields are unlikely to peak before central banks have effectively started tightening.
Many of the cheaper-priced companies are looking ripe for a suitor, or positioned for upgrades, or ready to deliver on catalysts, and they are facing less headwinds from bond yields and/or inflation, at least at this stage of the cycle.
For the first time in a long while, the US corporate results season, which is currently in full swing, is not providing more reasons to keep buying companies trading on already high valuations.
In Australia, however, a forgotten phenomenon is making a roaring come-back, and it only further adds to the rising risk profile of the local share market.
Companies are issuing profit warnings ahead of their financial results scheduled for February.
On Monday, as I am writing this week's Weekly Insights, all the chatter is about online furniture retailer Adairs ((ADH)) whose shares closed down in excess of -20% on the day following a disappointing trading update.
Earlier, the likes of Redbubble ((RBL)) and Megaport ((MP1)) disappointed with similar impacts, but the risk does not simply reside with technology and retailers. On Monday, Regis Resources' ((RRL)) quarterly production update was good for -13.8% on the day off an already very beaten-down looking share price that not that long ago was trading at a price nearly three times as high.
I think there's a message in these profit warnings in that the February reporting season might prove a lot riskier than the seasons from the past two years.
While it never is easy to identify the next company to drop the proverbial unexpected bombshell, it's probably not a bad idea to dial back on the overall risk-taking.
Financial markets have consistently underestimated the persistence with which the global pandemic continues to impact on society and economies.
Look no further than the fact shares in Flight Centre ((FLT)) surged to $25 in early October last year. They're now back at around $16.50. And there are plenty of other examples around.
Last week, Macquarie lowered its forecasts for multiple healthcare services providers, including Ramsay Health Care ((RHC)) and Cochlear ((COH)), as the return to normal for the sector continues to be pushed further out.
Macquarie's move can serve as yet another signal that many companies might find it tough to meet market expectations next month. In the same breath, the market's hesitance to price in higher and stickier inflation can equally be described as a case of too much optimism that simply couldn't be met.
It's good to keep this in mind when steering portfolios in the direction of ongoing strong economic growth this year. Analysts at Bank of America are preparing their clientele for a "recession scare" this year. Local market strategists at Macquarie concur: the health of the global economy is not what it appears to be.
Instead of buying commodities and cyclicals, Macquarie's favour lays with healthcare and staples, your traditional defensives in light of decelerating economic strength. While it may not have become undisputably clear to everyone from the latest data updates across the globe, Macquarie has spotted enough evidence to predict momentum has started to turn south.
History shows the combination of slowing growth and hawkish central banks, let alone higher-for-longer inflation and interest rate hikes usually does not come about without serious impact for equities. Macquarie has been preparing for a -15%-20% downward correction in Australian equities in 2022, with the Federal Reserve to change course only when equities approach or exceed the -20% decline.
Apart from the two favourite sectors mentioned, Macquarie also expects gold, real estate, utilities and telcos to outperform this year. Mind you, there are plenty of analysts and strategists who advocate overweight positions towards banks and the energy sector.
The summary above might not necessarily cover every potential risk that is weighing over risk assets this early in 2022, but I think it's only fair to state there is a lot to digest and to consider for financial markets. This almost by default means the outlook seems a lot more volatile and challenging.
How we, as investors, deal with this situation is very personal. But my favourite starting point for individual investors is always: do you sleep at night?
My personal approach over the years is that I use these periods of increased volatility and big draw-downs as an opportunity to cleanse the portfolio, increase cash, and be ready for whatever comes next. It may not be the most optimal strategy in that selling shares at the most optimal point is usually only logical in hindsight, but I feel anything is better than simply keeping the fingers crossed and hoping for the best.
More importantly, probably the best description I have come across recently is that market sentiment acts like a pendulum, implying it overshoots on the upside when things look great, and it is prone to overshoot to the downside when things look risky and uncertain.
It also implies investors will be presented with excellent opportunities, but we can only grab them when we are ready, with cash at hand.