Reporting season in review: August 2015
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 03 September 2015, 8:04 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
Global market turmoil turned a hectic August into a chaotic one for
investors. Macro volatility aside, reporting season was patchy at best
and concerning at worst for us.
The market has further tempered its
earnings expectations toward what looks like becoming a prolonged
period of benign growth, re-affirming our overall caution.
Cloudy outlook statements
Estimates of market earnings were already falling heading into August. While it's fair to say these low expectations were broadly met in FY15, company outlook statements were more cautious than we have seen in the last few periods while issued earnings guidance was in many cases below market expectations, or less comital than usual.
Subsequently, forward earnings estimates for FY16 were revised down a further 1% across the market.
Market expectations drove more misses than hits
While expectations were broadly met overall, there were more notable
exceptions to the downside than the upside.
Stocks suffering meaningful FY16 downgrades were punished heavily against
the nervous backdrop. The drivers ranged from stock specific (Seek, IAG) to
difficult sector conditions (Orica, Origin, Downer), to the difficult-to-predict
impacts of swings in currency and interest rates (Computershare, Ansell,
Cochlear).
Several companies actually delivered very strong results (JB Hi Fi, Harvey
Norman, Corporate Travel, Domino's Pizza), but fell after their results.
This suggests that the (rarer) stronger stories were well anticipated by the
market, and that the market's future expectations were not met by guidance.
This suggests to us a very fickle market.
Some surprise hits on the positive side
Among many of the stocks that beat market expectations were several
out-of-favour companies recovering off cyclical low-points or recent
downgrades such as The Reject Shop, Treasury Wines, GWA, Sims
Metals. Clearly low expectations were exceeded here.
Genuine positive surprises were delivered by companies achieving higher cost
reduction than expected (Medibank) and were generally concentrated among
smaller companies capitalising on specific themes driving genuine revenue
growth (Blackmores, Bellamy's, APN Outdoor).
Updated investment strategy
We retain our overall caution for several reasons:
- potential volatility around
the first Fed funds rate rise which we expect before the end of 2015 (in line with
Michael Knox's views);
- likely prolonged uncertainty around the trajectory of
Chinese and global growth;
- the digestion of a weak corporate outlook into
the seasonally difficult September-October period;
- short market interest
which has continued to rise despite market's pullback.
While we are cautious, we do also identify significant value on this pullback,
particularly among the banks and our High Conviction lists (updated 1-Sep).
We're pleased to say that our Model Portfolios have delivered meaningful 12
month returns ranging from 4-15% versus the market which has eroded by 3%
(including dividends) in what has been a very difficult last 12 months for
investors.
More information
Morgans clients can access our full Reporting Season Review featuring topical themes, winners and losers and stocks worth following up post reporting season. If you are interested in finding out more, please contact your nearest Morgans office.
Disclaimer(s): The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.