Australian sharemarket bounces back, despite challenges

Hopefully you will recall my column last week in which I wrote about New Zealand’s rather underwhelming local earnings season: so much so that, as of yesterday, the gains for this year on the New Zealand bourse, as represented by the NZ50 Gross Index, have been completely wiped out.

This week I’m going to go across the ditch and see whether they’ve done any better in the Lucky country. Sadly, it doesn’t justify a shopping trip to Toorak Road or even better a dinner at Mimi’s out at Coogee Beach, rather it will be the view from 20,000 feet.

Reporting season offers great insight into the current state of corporate Australia.  Overall, companies whose shares are listed on the ASX posted a solid set of results this August in spite of headwinds from a slowing economy and rising costs, especially labour and interest costs.  Given these challenges, most management teams guided the future earnings outlook somewhat conservatively, and this was a source of further disappointment for investors.

The Australian economy over the past twelve months has been more resilient than ours, even though both have been supported by population growth (Australia opened the borders well before we did) and low unemployment.  Like NZ’s, the Australian economy is slowing under the strain of weakening global growth and a Reserve Bank intent on taming inflation by hiking interest rates.  And this strain is hurting company profits.  Earnings for the top 300 Australian companies (ASX 300) this year are now 94% of what they were anticipated to be at the start of the 2023 financial year.  This 6% shortfall in expected earnings is in sharp contrast to the two prior bumper years where realised earnings were 110% and 115% of what analysts had expected at the start of the year.

A key challenge for Australian corporates today is the rising cost of doing business:  High labour costs, high energy prices, low productivity are all taking their toll on listed company profits.  Sound familiar?  Encouragingly we saw that many companies which reported first half financials were able to raise prices in the current high inflationary environment.  But going forward it will become harder to pass on costs.

Share markets are forward-looking by their nature.  In fact, for the finance purists, you will recall that a company’s value is thought to be the present value of all its future free cash flow.  Profit reports that on the surface appear poor, but result in the share prices rising, suggest the market was factoring in a worse scenario than what was actually delivered.  Conversely results that sound good but the share price falls usually means the outlook for the company was worse than the market had been expecting.  Investors should be alert to this, as often either could be an inflection point for company earnings and outlook and consequently its share price.

Australia is by no means immune from the “cost of living crisis” and higher mortgage rates have put pressure on consumer spending.  Interestingly, a number of Aussie retailers had reported negative sales growth in early FY24 trading updates but this earnings season it was the retailers who had more of the positive share price reactions to results. Shares in Harvey Norman, Premier Investments (who own Smiggle and Just Jeans among other brands) as well as Flight Centre all traded higher following their more bullish than expected outlook comments.  Investors who were already negative (so in “fund manager speak” they were “underweight” i.e., have less than a market exposure to a company’s shares) were now scrambling to buy back in after what may be the inflection point for better earnings next year.

In fact, Consumer Discretionary was the best performing sector on the ASX last month driven by a rise in the share prices of cyclical retailers, which delivered positive net earnings surprises over the reporting season.  Wesfarmers, most known to New Zealanders from its ownership of Bunnings and Kmart, was a key driver of the index gain, as its value-oriented proposition was a winner in a cost-of-living crisis.

The overall Australian share market was weaker in August driven by the decline in mining stocks which had a particularly weak results season.  The heightened economic uncertainty in China which saw the large fall in the Chinese share market last month (the Hang Seng China Enterprise (HSCEI) Index was down 9%) was an obvious headwind for companies like the miners which are so dependent on China for the export of their commodities.

So, in summary, Australia’s full-year reporting season was what some commentators have somewhat boringly described as “balanced”.  June half results were slightly below expectations as positive sales surprises were more than offset by weaker margins.  Dividends overall ended slightly ahead after a weak start.

Of the companies willing to give earnings guidance for the next financial year, nearly half flagged earnings that were below consensus expectations.  An uncertain macro-economic backdrop and rising input costs are the two main reasons driving this cautious approach.  It remains to be seen if the caution is justified, which largely depends on whether unemployment rises further and if the interest rate cycle has peaked (note the RBA held its cash rate steady this week) or merely just on hold.

Father’s Day has come and gone, and I was delighted to receive phone calls from my Sydney-based children.  Sadly though, none mentioned that they had ordered me the beautiful Candela C-8 Polestar edition foiling boat that I was hoping for and mentioned here last week.  I did get a few calls from friends though saying they wanted a ride if I had been so lucky!