Uncertainty across the economy and investment markets is creating enormous nervousness about the future. And an upcoming Federal election isn’t helping matters either.
Interest rates are at a cross roads. The economy is at a cross roads. And so is investor sentiment. We’re in a period where it’s tough to predict the next 12 months.
One good indicator is the health of corporate Australia, particularly the big end of town and its outlook. The latest profit reporting season has provided some interesting themes for all investors to be aware of.
Research group CommSec has tracked the earnings results of the top 200 listed companies for the July to December period and found:
• 94 per cent reported a profit.
• 50 per cent reported a lift in profits, although that was below the long term average of 61.5 per cent.
• 87 per cent paid a dividend, with 61 per cent lifting the dividend, 16 per cent cutting and 22 per cent leaving it unchanged.
• 48 per cent lifted cash holdings.
In a nutshell, our big listed companies have generally been doing it tougher than in recent years. But more important than the sheer numbers are the themes they have been talking about in describing general economic and business conditions.
1. Global uncertainty has had a big impact
Remember the sharemarket crash of last November and December? Our corporates certainly did and many said that period impacted their results.
Malcolm Turnbull was deposed at the end of August then came the Brexit stand-off in Britain, the China-US trade tensions and the second guessing of the Federal Reserve on US interest rates. As a result, sharemarkets were smashed globally and investors turned to fear.
It was a wild period for corporates and their customers, which impacted on many bottom lines. It also contrasts with the incredible turnaround in the first two months of this calendar year with the US sharemarket having its best start to a year in 32 years.
2. Resource companies have been boosted
One of the huge surprises of the last reporting season was the strong results from major resource companies like BHP and Rio Tinto. There had been predictions of weakness in energy and metal prices because of a slowing Chinese and global economy.
The reverse was the reality. Oil rebounded and iron ore prices defied predictions with a strong upward trend and it flowed through to good profits.
The big question is how much longer those prices can be maintained at these levels. Certainly coal prices remain uncertain amid a shift in sentiment to renewable energy by consumers and investors.
3. The housing slowdown hasn’t impacted profits … yet
While the average Australian, particularly in Sydney and Melbourne, is watching their home values fall, building companies have so far been immune from any profit hit. That’s more because of the nature of the building cycle than anything else.
Construction has a long timeline — purchase of land, finance, building approvals and then construction period — so the building part of the property cycle generally lags the price cycle by up to 18 months.
While property values have fallen because of a drop in demand and oversupply, there has been a big construction pipeline of new development which needs to be completed. Once those developments come on stream, a building downturn will follow as developers find it tougher to access financing and buyers.
4. China can be a volatile market
China accounts for 34 per cent of Australia’s exports, it’s our biggest customer, it’s a huge market … but it’s a fickle market.
If you can crack it, the profits roll in, but conditions can change dramatically. A comparison between vitamin giant Blackmores and dairy company A2 Milk are a classic case in point.
Blackmores was one of the first companies to crack the Chinese market, earning themselves huge profits and a share price rocketing to over $170. But in the last six months that share price has taken a hit down to $91 as the influential “daigou” buyers shifted to other suppliers. It was an unexpected turn of sentiment that has cost Blackmores dearly.
On the other hand A2 Milk Company has seen its share price rise from $5.83 to over $10 in the same period because of record profits from a surge in exports to China. The company has diversified into the US where exports are building nicely.
5. Retailers must get their business model right
Soft wage growth, fragile consumer sentiment and the trend toward online shopping, with its price comparisons, has meant a challenging period for retailers. Consumers are asset rich (from their homes and superannuation) but cash poor (because of low wage growth) and so are constantly bargain hunting.
The impact has been a squeeze on profit margins and the need for a constant “always on-sale” marketing cycle.
Layered on top of this is how well traditional retailers have developed their digital strategy to fight the surge in online shopping. Those with a well-executed strategy to build online sales are in great shape. The rest have long struggle ahead and investors are not happy.
Originally published as Watch list for share investors