ASX-listed companies posted better-than-expected earnings in the full year reporting season, although the averages hid a wide variation in individual results, says Pendal’s Brenton Saunders.
Inflation, interest rates, labour availability and the impacts of and trade working capital increases were the biggest talking points in a reporting season that was complicated by a shifting global macroeconomic environment.
But uncertainty about the outlook for interest rates and consumer confidence has led many companies to be conservative about providing forward guidance, leaving the outlook unclear, says Saunders, who manages Pendal MidCap Fund.
Saunders’s highlights, sector by sector:
A somewhat surprising mix of results for the sector that is traditionally most likely to suffer the effects of higher interest rates.
“Interest rate-sensitive, consumer discretionary stocks have performed much better they might have expected them to in this environment. The impact of higher mortgage rates is yet to be reflected in large parts of discretionary retail.
“We have tell-tale signs of low consumer sales in some areas, but on average, consumer purchases, consumer foot traffic and the ability to retain margin has been good.
Better than expected results from some of the high-flyers caught the market by surprise.
“There was an element of tech that did really well – some of the racier tech stocks had good results, good cash flow and good prospects – that caught the market by surprise. Unprofitable tech battled more.”
Companies in the electrification and decarbonisation sectors performed very well, led by the lithium producers.
“Lithium just powered ahead. From companies that are still in development or exploration to companies that are already producing, we’ve seen some spectacular outcomes. These companies are getting bigger quickly.
Find out about
Home builders and related businesses are clearly starting to feel the effects of higher interest rates, which has shown up in their reluctance to provide earnings guidance for 2023.
“They are being very conservative about guidance and their ratings are starting to face some headwinds.”
The banks were disappointing and mostly failed to translate higher interest rates to earnings.
“Competition and costs remain a big impost for the banks. That was that was quite disappointing pretty much across the board.”
Energy was understandably strong given the higher global prices for oil, coal and gas because of the Russia Ukraine conflict.
“Both the refiners and the energy producers are cycling very high historical prices and had bumper profits and record of dividends.
“The energy sector has transformed itself very quickly from, in some cases, pretty highly leveraged to unleveraged and paying strong dividends in a very short space of time.”
Saunders expects this sector to remain a beneficiary of the ongoing Russia-Ukraine conflict and associate supply chain disruptions.
This sector is benefiting from a lot of new work being tendered by government as well as the from the mining, energy and renewables sectors. The negatives are high labour cost and raw material inflation.
“Most are seeing high amounts of work available for tender and larger contract books. There is a mix in terms of margin performance with high labour cost inflation proving a headwind to some. Available contract work in the space is likely to remain elevated especially in mining, energy and renewables.”
The outlook is complicated by global macro-economic events, Saunders says.
“The market came into reporting season in a frame of mind that we had seen the worst of bond yields, inflation was slowing, and the Federal Reserve interest rate policy would moderate, he says.
“The market was quite heavily positioned for that.
“Following the Jackson Hole meeting, with Federal Reserve commentary was much more hawkish the whole narrative changed in a very short space of time.”
Saunders says from a portfolio construction perspective, investors continue investors should continue to exercise caution with hawkish US monetary policy being reinforced at the Jackson Hole Meeting. The interest rate cycle has more to run.
“You’ve had very wide divergence in performance. Look for stocks that are either beneficiaries of the move higher in interest rates or those whose business are not overly geared to higher rates and have been heavily sold off year to date.”
The sharp rally in mid-June shows how quickly the market can bid up oversold companies, but the macro outlook remains mostly depressed, he says.
“It’s very much an alpha kind of environment, where staying across stock specifics is not only useful, but also an absolute necessity.”
Brenton is a portfolio manager with Pendal’s Australian equities team. He co-manages Pendal MidCap Fund and our natural resources portfolio, drawing on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.
Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at September 7, 2022. PFSL is the responsible entity and issuer of units in the Pendal Midcap Fund (Fund) ARSN: 130 466 581. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com