SEPTEMBER 2022 – ISSUE 8
The August 2022 Reporting Season
Watch for outlook comments at AGM’s
All eyes are on AGM season after company reporting season showed that rising interest rates and higher fuel and food prices are impacting the outlook for households and businesses.
Australian companies’ earnings broadly met market expectations, though positive surprises were at the lower end of the spectrum. While many companies reported that they are not yet seeing a material deterioration in the operating environment, others were more circumspect with a relatively large number of companies not providing earnings guidance due to uncertainty.
Certainly there was recognition across the results that tighter monetary conditions and cost of living pressures have the potential to have a lagged impact on the economy.
“In general companies are taking a conservative stance in their outlook statements indicating they are unsure about how the effects of the RBA rate hikes will play out” says Jelena Stevanovic Portfolio Manager at Platypus Asset Management.
“CEO and Chair commentary in the AGM season will be one of the keys to how markets fare over the remainder of 2022”
Estimates for next year’s earnings per share growth pulled back to 3.9 per cent from the 5 per cent expected pre-reporting season. Materials and industrials were the main drags, offset by upgrades for the financials.
The uncertain outlook means the annual meetings held over the next two months will be closely watched by investors seeking insight into how the economy is tracking.
Cost pressures were a recurring theme of the 2022 annual earnings reporting season but there are signs that the worst of rising prices are in the past.
The cost of freight, technology talent and mining development were among the costs called out by companies as past their peak.
The potential for easing costs comes as supply chains start to heal. Port congestion is reducing, and availability of parts and components is improving.
Still, inventories are higher than usual. As the weeks count down to Christmas, retailers are keen to ensure they do not get caught out again after suffering shortages in recent years.
The test will be how well consumers fare over the remaining few months of 2022.
Results season showed consumers remain resilient but there are pressures building, especially as higher mortgage interest rates start to bite household budgets.
The higher rates should be good news for the banks, which are to date not seeing improvements in their net interest margins. Unless they compete it away in the hunt for market share, this should change over the next twelve months.
Credit quality remains benign for the banks, but they will likely see slowing loan volume growth as the housing market turns lower through the remainder of the year. Housing slowdowns have wide-reaching impacts, with immediate implications for both banks and demand for building materials.
Higher interest rates will also start to test leveraged companies that have not hedged their loans.
And there is further bad news for companies with operations in Europe, where weak consumer sentiment and soaring energy prices are hurting.
On the upside, the worst impact of COVID appears to be in the rear-view mirror, according to company reports, with people back on the move and absenteeism easing.
And the economy’s natural shock absorber — a falling Australian dollar — is kicking in to ease the pain, although benefits from the dollar’s falls to date are yet to become obvious.
For the Platypus Australian Equity Fund, the reporting season was good — but not as good as the interim reporting in February 2022. That said, price action was a lot more forgiving than in February.
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