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Aussie equities: What we can expect from earnings in the second half

Company earnings may slow in the second half — but some sectors are better placed than others, says Pendal’s BRENTON SAUNDERS

  • Earnings season strong on revenue, weaker on profits
  • Economic cycle stronger for longer
  • Find out about Pendal MidCap Fund

AUSTRALIA’S economic cycle has gone on longer than expected – and it shows in the recently ended ASX earnings season.

Somewhat surprisingly, most parts of the economy are still in reasonably good shape despite a string of interest rate rises.

The strong jobs market is a factor, helping prop up consumer spending.

“But the expectation is that higher interest rates will likely hurt earnings in the rest of the financial year,” says Brenton Saunders, who manages Pendal MidCap Fund.

“Across the market as a whole, revenue beats were pretty widespread even though many companies missed earnings forecasts at the bottom line,” says Saunders.

“Revenue beats were much higher than profit beats.

“We saw profit margins reduce and that relates to higher costs.

“In many cases, despite high product price increases, costs increased at a faster rate resulting in margin pressure.”

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Midcap Fund

Revenue beats came in at 25 per cent versus misses of 17 per cent, according to Barrenjoey research. In contrast, the research shows earnings per share (EPS) misses of 38 per cent and beats of 35 per cent. The EPS misses are elevated by historic standards.

“We saw profit margins reduce and that relates to higher costs,” Saunders says.

“In many cases, despite high product price increases, costs increased at a faster rate resulting in margin pressure,” Saunders says.

Earnings season also demonstrated that companies have significantly higher interest costs as a result of the rates increases — which consensus forecasts underestimated in many cases, Saunders says.

That has also contributed to bottom-line misses.

“Companies have different mixes of fixed and floating interest rate exposure and that’s difficult for the market to model.”

In terms of individual sectors, it was a “mixed bag”, Saunders says.

Here’s a quick sector snapshot:


Profits in the resources sector were weaker for the December half, with a few exceptions such as lithium, nickel and coal.

Other commodity prices were lower, year-on-year in the final six months of 2022 driving profits lower.

“Similar to a number of sectors, the main negative for resources companies was costs.

“Unit cost guidance from the vast majority of companies has gone up and for a number of companies that’s resulted in a downgrade of earnings expectations.”

Beyond the Numbers

Crispin Murray’s
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“In resources we also saw some lower dividend outcomes after the bumper payouts last year.

“That’s because profits weren’t quite as good as they were a year back, and increased capital expenditure as new capacity is built.”


The banks – half year from Commonwealth Bank, Bendigo and Macquarie Group, and quarterlies from National Australia Bank, Westpac and ANZ – reported strong net interest margins.

“The main negative across the banks is competition, especially in the home-lending and term-deposit markets, as fixed rate mortgages roll-off.

That is putting pressure on earnings forecasts.

“Cyclically we are close to peak interest rates and alongside higher competition means the banks are close to, or at peak net interest margins which many of the banks alluded to.”

Consumer discretionary

It’s a similar story with many consumer discretionary stocks.

Interim profits were mostly strong, though the current half year looks softer as the impacts of higher interest rates dampens spending.

“It’s been a case of stronger for longer for consumer discretionary though it wasn’t quite as ubiquitous across discretionary retail companies, compared to the June 2022 half.”


Building and construction was mixed, Saunders says, with surprises on the up and downsides, in part depending on where the bulk of business was undertaken – locally, in the US or in Europe.

Consumer staples

Consumer staple stocks reported strong results with Woolworths being the stand-out, in part thanks to higher goods inflation.

But costs also compared well to last year’s COVID impacted costs, which meant some margin expansion.

Tech and healthcare

Technology was relatively strong, Saunders says.

“Many of the tech and growth companies rolled out some kind of cost reduction program with a bigger focus on cashflow which the market took well.”

Healthcare stocks results were mixed in part because of comparisons to the previous, COVID-impacted half year, Saunders says.

That worked against some companies, and advantaged others.


Finally, stocks in the real estate investment trust (REIT) sector broadly announced lower-than-expected-revaluations.

“The weakest part of the property sector is office while industrial is strong, and so too some niche areas like storage and convenience.

“The second half of this financial year is likely to see property revaluations increase putting some incremental pressure on REIT balance sheets. ”

About Brenton Saunders and Pendal MidCap Fund

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. 

Find out more about Pendal MidCap Fund here

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at February 8, 2023. 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

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