Despite being cautiously optimistic about company earnings this month, some investors and economists are preparing for tough times ahead amid sticky inflation risks and continued consumer weakness, while markets wait for a rate cut.
Over the past few weeks, there has been a deluge of earnings results and trading updates from ASX-listed companies, which AMP chief economist Dr Shane Oliver said showed “fractionally” better-than-normal numbers, in line with other major economies.
Economists Stephen Miller (left), Jun Bei Liu and Shane Oliver say there could be more tough times to come.Credit: Andrew Quilty, Renee Nowytarger, Dominic Lorrimer
“Australian companies performed a little better than the average over the last 20 years,” he said. “They’re resilient but not shooting the lights out.”
Oliver said about 42 per cent of companies had so far surprised to the upside compared to 38 per cent which surprised to the downside, but that the average surprise was negative, with more weakness among larger companies.
That’s partly because of worse results from big energy companies, Oliver said, following a substantial fall in commodity prices. Energy stocks benefited from very high prices for coal, oil and gas in 2022 and 2023 as a result of the war in Ukraine, but those prices have since fallen.
Tribeca Investment Partners portfolio manager Jun Bei Liu said this reporting season had been better than expected, with most analysts positively surprised.
“Companies talked about slowing revenue momentum, but it was better than analysts expected, and margins and forward-looking guidance were also better than expected,” she said. “There are signs confidence had picked up among investors with mergers and acquisitions picking up in the last few weeks. Every second day there has seemed to be a takeover offer.”
However, Liu said she was surprised at how quickly momentum in consumer staples including supermarkets had unwound, and noted companies which were COVID beneficiaries, including Domino’s Pizza and Collins Foods, had earnings slow.
Liu said consumer discretionary companies, such as JB Hi-Fi, proved more resilient than markets were expecting, and that the technology sector had been “on fire” with strong results across the board.
While company earnings had not collapsed and share prices were “past the worst”, Liu said there was still some softness to come in revenues and earnings.
Domino’s Pizza boss Don Meij last month issued the company’s fourth profit downgrade in three years.
“On the revenue front, and in corporate earnings, there’s another six months [of weakness] to go with slowing consumer spend following a drop-off in the last few months in terms of traffic and confidence,” she said.
GSFM adviser Stephen Miller said he was “cautiously optimistic” about markets, but flagged geopolitical risks and the possibility of sticky inflation as factors which could delay the onset of interest rate cuts priced in by the market.
Miller said the global economy’s performance was important because Australia was a relatively trade-exposed country. The Australian sharemarket also often closely tracks its US counterpart.
“To the extent that inflation looks sticky in the US, it means the Federal Reserve may keep rates higher for longer which may remove a substantial tailwind for the US market,” he said.
“There’s also a [feverish] political environment as we enter the US election campaign period, with pretty poor policymaking on both sides of politics. The stock rally in the US currently is pretty narrow, with tech stocks leading it higher, meaning its on more fragile footing.”
And things were not looking as good elsewhere, Miller said, with the UK and Japan in recession and Europe languid in terms of growth.
“There are things to make me nervous, even if I’m cautiously optimistic,” he said. “The RBA isn’t close to cutting rates yet, and the Australian economy looks more fragile than the US, with consumers looking to be cautious. There’s possibly too much optimism.”
Oliver said while there was hope for the long term, earnings results suggested the Australian economy was a “bit soggy” with some tough times ahead.
Insurers performed well on the back of higher premiums, and mining companies and defensive companies such as utilities remained fairly robust, but Oliver said consumer staples were weaker and that banks provided mixed results.
“Generally, guidance was OK, and companies seem to be doing well managing costs, but there were less than normal companies reporting profit growth on a year ago, and less dividend growth which suggests companies are less confident,” Oliver said.
“The optimism in markets relates to later this year, especially for consumer stocks, with stage 3 tax cuts skewing towards lower- and middle-income earners, meaning more may be spent, and hopes for interest rate cuts through the second half. But there could still be another six months of rougher times.”
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