THE recent Australian earnings reporting season was marginally disappointing.
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Guidance from companies was not as upbeat as suggested, although perhaps the most recent softness in confidence may be more representative of the forward guidance from Australia’s largest listed companies.
Compared with the February reporting season, a higher proportion of companies did not deliver earnings in line with forecast and a smaller proportion beat earnings forecasts.
Stripping out the resources sector, the median company only produced earnings per share growth of about four per cent and expect about the same in 2018.
One reason for the recent dip in confidence is energy prices.
Retail energy prices rose about 20pc in July, increases for big business were larger.
This will dampen consumer spending on discretionary items, impacting retailers.
However, other businesses, such as packaging company Orora (ORA), which claim to be able to pass on these higher costs, are still worried about supply security.
Even though Australia is coal and gas rich, energy prices and reliability could be a future headwind.
Next year looks more optimistic.
Global yields will likely rise a little, and the seeds of a major bond market selloff (due to inflation) don’t seem to be present.
Wage rises across the developed world remain benign.
While economists are convinced the cycle lives on and the scarcity of workers will lead to higher wages, there are factors working against that.
Older people are working longer and are less demanding of wage rises.
Substitution of labour for capital in business is more important and pervasive.
The jury is out on whether inflation will re-emerge.
While the Taylor rule and the Fed’s own dot points point to cash rates at 3-4pc, the market pricing is much lower.
I favour companies reinvesting in their business to grow earnings irrespective of the macro environment.
I am conscious the current equity rally is long by historical standards and valuations high.
Market pull backs have been very limited; underpinned by the surge in global liquidity.
In this environment, and given country tensions rising, it will be important to be watchful and nimble.
The long-term trends of the past 35 years are giving way to a new, volatile economic cycle.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by NAB.
