Rudi's View | 10:00 AM
By Rudi Filapek-Vandyck, Editor
Investors are trained to be optimistic and hopeful but if the August reporting season proved one thing it is that hope is not an ideal strategy during times when economies are slowing and household budgets persistently under duress.
On balance, August results proved a rather uninspiring experience that mostly triggered a lukewarm reception from investors. The answer 'why' was yet again confirmed by this week's update on GDP growth locally that, at 0.2% quarter-on-quarter and 1% annualised, printed the lowest outcome for any quarter in Australia since the early 1990s, outside of the covid downturn.
Equally important: consumer spending detracted -0.2% from economic growth in the June quarter (the worst number post-GFC ex-covid) and it was spending by the government, foreign students and visitors that kept the pace above zero.
Economists at Oxford Economics responded as follows:
"Net exports and public demand were the major contributors to growth in the quarter.
"The economy is lacking a clear engine of growth. Tight policy settings have successfully reined in demand, but inflationary pressures are yet to be completely tamed. Income tax cuts and consumer subsidies will aid momentum in the second half of the year. But any improvement in activity will be unspectacular."
The follow-up from peers at NAB: "We continue to assess that soft growth through H1 will be the trough in growth and look for improving but still below trend growth in H2 contingent on the response to tax cuts and ongoing easing in inflation for household consumption. Overall, we continue to see growth of around 1% this year."
Corporate results in August have very much reflected that reality. Miners, energy companies and other cyclicals proved the biggest disappointments. Small caps delivered many hits and misses, but more misses as cost increases and the need for more investments put investors' patience to test.
Conclusion from Morgan Stanley: resources remain trapped in value.
Equally important: the weaker priced laggards failed to live up to hope and expectations, while highly-priced growth champions refused to falter. The latter is best illustrated by the fact WiseTech Global ((WTC)) crowned itself to most valuable contributor for the ASX200 throughout the month, after the banks.
WiseTech is nowadays part of the ASX50 but its index weight hardly exceeds 0.50%, which just shows how tepid most stocks have performed during the month. WiseTech shares did put in a 25% rally on improved margins, new customers and new products and refused to give it back, outside of a small pullback on nervous profit taking.
As is local custom, EPS forecasts weakened throughout the season, as expected, but the truly sobering observation is forecasts for FY25 have shrunk too. In Macquarie's case, a projected 10% increase has reduced to... virtually zero. Resources are mainly to blame, but they are not the only ones responsible.
Macquarie's response: "FY25 earnings recovery... aaaand it's gone".
Market consensus forecasts are not quite as pessimistic, with forecast FY24 EPS now at negative -4.3% and the FY25 forecast at a positive 4%. The long term average in Australia is circa 5%. It looks like the economic prediction of Oxford and stockbroking analysts are connected at the hip: "any improvement in activity will be unspectacular".
As also flagged by analysts at JP Morgan during the month: falling forecasts with a share market near an all-time record high makes for an expensive valuation. Too expensive, probably, to be maintained.
Morgan Stanley did the numbers, also taking into account where markets are in the cycle as well as the level of bond yields, and concluded trading on an average forward-looking PE ratio of 17.5x the Australian share market has seldom looked as "expensive" as at the end of August.
On the broker's assessment, forward multiples for every single sector except Energy at the end of last week were at a twelve months' high.
No surprise, some technical analysts are toying with the idea the ASX200 might have put in a so-called double top in August, suggesting more weakness ahead but also that we won't see the index returning to these peak levels anytime soon.
The FNArena Corporate Results Monitor is a reflection of the above. Comprising of more than 350 companies (more updates are in progress) covered by at least one of eight leading stockbrokers, this Monitor is likely the most comprehensive insight available in Australia - with a history dating back to 2013.
Combining financial results with outlook statements and analysts' receptions of both, the Monitor has established some 36% of all financial updates in August have disappointed, contributing to forecast downgrades, while 28% managed to 'beat'.
Placed in an historical context, this places August 2024 at the top for 'misses' and near the bottom for 'beats'. It has been rather disappointing, Barrenjoey has concluded. Looking at those numbers, it's difficult to disagree. Observe also how, after updating 350 companies, the average price target in the FNArena Monitor has hardly moved.
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