Australia | Mar 03 2009
By Chris Shaw
The February reporting season delivered mixed results as analysts seem to have found almost as many positive surprises as disappointments. What may surprise, given Australia’s share market has weakened since the beginning of February, is results were actually good enough for the Australian market to outperform many of its global peers.
CommSec chief equities economist Craig James notes for the two months to the end of February the All Ordinaries has fallen by 9.9%, but this is significantly better performance than the 19.5% fall for the Dow Jones Industrial Average over the same period. Since the beginning of profit season in late January Australia’s relative outperformance has been even better with he All Ords losing 6.7% against a 19.3% fall for the Dow, a 15.6% decline for the FTSE in the UK and an 11.8% fall for Japan’s Nikkei.
James takes the view this outperformance was helped by the solid earnings performance of Australian companies in general, as having reviewed 270 profit results his numbers show corporate revenues rose by 16.3% in the six months to the end of December, or by an even more impressive 23.9% if financial sector stocks are not included.
Excluding diversified financials and real estate stocks, where results were impacted by mark-to-market accounting requirements, average earnings per share in the period fell by 6.1% compared to year-ago levels, which James suggests shows corporate Australia is doing relatively well when compared to the gloomy picture abroad.
James also suggests the performance of the Australian share market shows investors generally believe corporations are making the right moves to deal with the current economic environment, whether it be through raising capital, cutting dividends or trying to steal market share from competitors.
One thing that makes the profit season just gone an unusual one, in James’ view, is there is generally an over-riding theme to emerge from any particular profit period but this time the dominant factor has been a lack of consistency. Dividends are an example, as while some companies have lifted payouts, others have maintained them, while many companies have reduced payouts to strengthen or support their financial position.
Outlook statements are another example, James noting a number of companies have been relatively straight-forward in offering earnings guidance in coming periods but others have used the global financial crisis as an excuse to avoid offering any detailed outlook commentary.
Even allowing for this James suggests one general conclusion to take from the reporting period is companies are still making money and meeting their obligations as cash and operating profits are still generally increasing even if more companies are reporting accounting losses.
Looking forward James sees a number of issues investors still need to face, the biggest being the instability of the global banking system and the lack of action by authorities in addressing this problem. In his view this means there is a chance the Australian market slides further, with 3,000 for the main index a possibility, before the recovery process begins around mid-year.
At present James expects the All Ordinaries will hit 3,400 by the middle of the year and 3,800 by the end of 2009, though he cautions even these targets appear something of a stretch at present. Valuations are cheap but it is the lack of confidence in the global economic and financial outlook that will remain a barrier for prospective investors for the time being in his view.