Rudi’s Comprehensive February 2021 Review

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Download related file: FNArena-Reporting-Season-Monitor-Feb-2021

The story below is a compilation of stories relating to the February 2021corporate reporting season in Australia, published between late January and early March. Attached is FNArena’s final balance for the season.

Content (in chronological order of publication):

-Corporate Reports To Provide (Some) Answers
-February: Reason For Optimism
-Pre-Season Conviction Calls
-2021, The Year Of Earnings Recovery
-February Is Feeding Market Optimism
-February: Early Days, Full Of promise
-A Different Environment For Dividends
-February 2021: Banks Are Back!
-A Supercycle In Dividends
-Best Set Of Numbers In A Decade
-The Market Is A Duck Pond
-When Gold Meets Its Master
-Bond Yields Won’t Rise Forever
-A February For The Record Books

By Rudi Filapek-Vandyck, Editor FNArena

Corporate Reports To Provide (Some) Answers

As per standard practice, the upcoming reporting seasons in the US and here in Australia next month (February) might reveal various timely insights for investors. Though it is likely market optimism regarding Australian housing markets, including construction and building materials, and consumer spending will over-rule minor operational hiccups in February and March if companies are leveraged to those favourable themes.

Though investors always look towards reporting seasons to provide both health checks and insights about new and upcoming trends, in past years broad share market trends have predominantly been determined by the macro-picture, often in contravention to specific outcomes during February and August reporting seasons in Australia.

February: Reason For Optimism

The in-between earnings season running from September until late December might have already given away the big surprise awaiting investors in February, but general optimism among analysts and professionals has been building that corporate results are likely to come in the form of more beats than misses, and with the need for increased forecasts continuing to fuel investor optimism.

All shall be revealed over the next four weeks, of course. And suffice to say: there will still be the occasional shocker that triggers a serious shellacking of the share price.

What is markedly different this time around is analysts are continuously upgrading their forecasts. If this is not triggered by rising commodity prices or by improving sector prospects, it is being triggered by corporate market updates. Think discretionary retailers. Think financial platforms. Think Buy Now, Pay Later service providers.

Ord Minnett Senior Investment Analyst Sze Chuah reports this big shift in market dynamics has led to market consensus for FY21 growth in earnings per share (EPS) to lift from a negative -2.2% to a positive average of 11%. Note: this average has predominantly been carried higher by banks and resources companies, but irrespectively the trend and investor optimism are very palpable.

At least until hedge funds in the US quickly turned into forced sellers of large cap equities

Ord Minnett has lined up its favourites for a positive surprise in February: CommBank ((CBA)), Rio Tinto ((RIO)), Amcor ((AMC)), James Hardie ((JHX)), Vocus Group ((VOC)), and Sonic Healthcare ((SHL)).

Candidates likely to disappoint include Crown Resorts ((CWN)), Flight Centre ((FLT)), Qantas ((QAN)), and Sydney Airport ((SYD)), predicts the broker. Travel restrictions have remained in place, hence.

Do note: if current market forecasts prove correct and the average EPS in Australia has declined by -19.5% in FY20, and FY21 will see a rebound in the order of 11%, this still implies overall profits remain well below FY19 level, and the market will need at least another year to fully catch up with the losses incurred by the global pandemic.

Sze Chuah doesn’t think it’s unreasonable to expect the -19.5% for FY20 will be recouped in the following two or three years.

Pre-Season Conviction Calls

StockbrokerMorgansbelieves plenty of opportunities abound in today’s share market. One need not look any further than the list of “Current Best Ideas” that has been updated ahead of the February reporting season. This list contains no fewer than 45 ASX-listed stocks.

Stocks mentioned include Aristocrat Leisure ((ALL)) and Coles Group ((COL)), as well as Macquarie Group ((MQG)), Westpac ((WBC)) and Orica ((ORI)), not to forget BHP Group ((BHP)), ResMed, NextDC ((NXT)), and Incitec Pivot ((IPL)).

A few of the lesser known names include Booktopia Group ((BKG)), Universal Store ((UNI)), Kina Securities ((KSL)), Strandline Resources ((STA)), and HomeCo Daily Needs REIT ((AQR)).

Equally important, perhaps, is the fact the market strategists only recently added Booktopia, Universal Store and HomeCo Daily Needs REIT. Key ASX20 removals include Amcor and Rio Tinto.

***

The team ofQuant analysts at Credit Suissehas tried to identify major surprises for the February reporting season in Australia and the one stand-out observation is the team has identified only one candidate that is likely to both disappoint in financial performance and receive a negative share price response Appen ((APX)).

Credit Suisse’s fundamental analysts are still in doubt about top line growth, plus AUDUSD is adding to the company’s headwinds.

A few other candidates are seen delivering not so good financial results, but the quant analysts are not anticipating a firmly negative share market response. Those companies include Altium ((ALU)) and Iress ((IRE)), and to a lesser extent Infomedia ((IFM)), WiseTech Global ((WTC)), and Ansell ((ANN)).

Candidates likely to deliver a positive surprise and receive a positive reward include Coles Group, JB Hi-Fi ((JBH)), Harvey Norman, Audinate Group ((AD8)), Aurizon Holdings ((AZJ)), Sonic Healthcare, Charter Hall, and Goodman Group ((GMG)).

Kogan ((KGN)) is equally mentioned, but the Quant analysis is not sure about the subsequent share price response.

****

Ord Minnetthas updated itsSuper 7list; stocks that stand out from the pack and should reward investors handsomely in the year ahead, a call made with High Conviction:

-Charter Hall
-James Hardie
-National Australia Bank ((NAB))
-Rio Tinto
-Santos ((STO))
-Super Retail Group ((SUL))
-Transurban ((TCL))

****

AtWilsons, the overriding view is that analysts’ forecasts for the year ahead will be proven too conservative in light of improving conditions for Australian companies.

Wilsons has updated itsAustralian Equity Focus Listahead of February, with the expectation that none of the current inclusions are likely to issue a profit warning or deliver such a negative surprise that analysts need to go back to the drawing board and re-assess their positive view with the sole exception of Appen.

Similar to analysts elsewhere, Wilsons fears the stronger Aussie dollar might weigh on the company’s guidance for the year ahead this month. Appen is still included in the selection.

The selection of stocks essentially represents Wilsons’ highest conviction recommendations and currently comprises of ResMed, News Corp ((NWS)), Macquarie Group, James Hardie, CommBank, Northern Star Resources ((NST)), Transurban, CSL ((CSL)), BHP Group, Aurizon Holdings, OZ Minerals ((OZL)), National Australia Bank, Seven Group ((SVW)), Super Retail Group, Santos, Goodman Group, Reliance Worldwide ((RWC)), EML Payments ((EML)), Worley ((WOR)), Aventus Group ((AVN)), Aristocrat Leisure, Telix Pharmaceuticals ((TLX)), ANZ Bank ((ANZ)), and Xero ((XRO)).

2021, The Year Of Earnings Recovery

Calendar 2021 will be the year of earnings recovery in a broad sense, analysts at Macquarie agree with Ord Minnett and others. Such positive outlook for corporate earnings should, all else remaining equal, translate into a positive environment for the share market overall, suggests Macquarie.

Most favourited stocks leading into the February reporting season are: Telstra ((TLS)), Nine Entertainment ((NEC)), Star Entertainment Group ((SGR)), Ramsay Health Care ((RHC)), and Downer EDI ((DOW)). All these have suffered from the pandemic last year and are poised for a firm recovery next, on Macquarie’s analysis.

Macquarie also likes BHP Group, Rio Tinto and Fortescue Metals ((FMG)), for their prospective dividends, while Qantas has been singled out for a likely dividend disappointment.

In a broad sense, this year’s global optimism on top of the post-covid recovery should see limited downside risk for equities, but with rising bond yields, predicts Macquarie. This will dramatically change dynamics for equities in that the momentum now favours cheaper priced ‘value’ stocks, away from richer priced Growth & Value.

Among covid-losers (Macquarie’s own terminology), and outside of the five candidates mentioned earlier, Macquarie likes Healius ((HLS)) and Suncorp ((SUN)) with the added notion the latter might report a weak set of financials this month, but Macquarie would treat share price weakness as a buying opportunity.

In the basket of Quality stocks, Macquarie still very much likes James Hardie and Charter Hall ((CHC)). Among the covid-winners, the broker’s three favourites are Harvey Norman ((HVN)), Woolworths ((WOW)), and Domino’s Pizza ((DMP)).

Embedded deeper inside the research report, Macquarie expresses some reservations about Zip Co ((Z1P)) and Bravura Solutions ((BVS)), both expected to disappoint for different reasons in February, while AGL Energy ((AGL)) is described as a “structural short”.

Resources are projected to generate the strongest sector growth in FY21, but not in FY22 (negative forecasts thus far) while Property Trusts remain the Big Laggards this year, following the negative performance in FY20. The come-back sector this year is, however, the banking sector with three consecutive years of negative EPS growth to be transformed into a positive outlook.

February Is Feeding Market Optimism

As the February reporting season in Australia is slowly warming up, investors are anticipating stronger-than-expected profit results, leading to increased market forecasts, opening the gates to higher valuations and less downside risk.

At face value, they do have a few strong indicators on their side, including:

-quarterly corporate results in the US where circa 80% of all companies reporting to date have managed to beat market forecasts;
-historic precedents, including 2009, showing analysts are too conservative when the big economic turnaround arrives;
-Australian corporate results post-August last year (Sep-Dec) saw 49% beating expectations versus a long-term average of circa 33%^(*)

Other factors to consider include ongoing policy support from major central banks and governments, including a fresh stimulus package from the Biden administration in the US; further progress in rolling out vaccinations; and robust consumer spending as many households are left with spare cash and limited avenues for spending.

These are all positives and probably explain why equity markets have seldom paused to take a breather over the past four months. Earnings forecasts are on the rise and companies are expected to not only justify those increases, but add more reasons for further upward adjustments.

REA Shows The Way

The case for ongoing optimism was once again highlighted by local leading property portal REA Group ((REA)) on Friday. While the company’s financial result has triggered further upgrades to analysts’ forecasts, and to valuations and price targets, everyone can see from Stock Analysis the share price had already well and truly anticipated this would be the case.

This, however, has not stopped REA shares to continue rising post Friday’s release. Today, as I am writing these sentences, the shares are up a further 3.5% highlighting the one question that has at least part of the investment community nervous: are markets not expressing too much optimism and at what point willthe musicstop playing?

For the time being, such secondary considerations are being dismissed and it is very likely that ongoing positive corporate results and updates will continue to feed in ongoing market optimism.

As theFNArena Corporate Results Monitorshows, of the 15 local companies that have reported in February thus far, only two have missed expectations and 10 did better for a 66.7% “beat” thus far. It’s not quite the 80% achieved in the US, but then nobody outside the US knows how to work financial markets as well as do American CEOs.

The bottom line here is that market optimism feeds off positive input, and investors are currently presented with a large and varied smorgasbord of positive inputs.

Market Momentum Remains Divided

One important lesson to be learned from the REA exampleis that investors better not stare themselves blind on valuations, price targets and forecasts pre-results as the current trend suggests most will reset at a higher level post release.

To what extent, of course, remains an open question and ultimately dependent on what exactly is being reported and subsequently adopted by analysts to spice up their expectations.

Then, of course, there is always the question: what will the market do with the freshly updated insights?

Credit Corp ((CCP)) shares pretty much had the same experience as REA Group, as did Nick Scali ((NCK)) and Pinnacle Investment Management ((PNI)), but producer of nickel, copper, zinc and precious metals, IGO ((IGO)) did not despite also delivering a robust earnings “beat”, while shares in ResMed ((RMD)) are equally struggling despite its quarterly triggering further increases to this year’s consensus forecast.

Probably the best example in this regard was provided by global leading packaging company Amcor ((AMC)) as management lifted FY21 guidance for the second time together with releasing a better-than-forecast financial performance.

After an initial positive response, the share price was clobbered on day two but did manage to resume its uptrend since. The shares are still trading more than -12% below updated consensus price target of $16.99 while promising a dividend yield in excess of 4%.

The problem a stock like Amcor is facing is that investor optimism is feeding into more risk taking and this means smaller caps and mining stocks are seen as a lot more interesting. Amcor is also a rather defensive business, which is another no go, unless markets go through conniptions or the economic recovery story is in doubt.

And while management at the company would not necessarily agree, Amcor is also seen as a covid-beneficiary by investors, and this year’s trend is all about buying covid-victims who stand to benefit from vaccines, recovering activity and borders re-opening.

None of this means Amcor shareholders will not be rewarded for the excellent performance delivered by management last week; what it does show is that companies like Amcor will need to work harder for a possible lesser reward, or at least less quick, than for others that are currently at the centre of market momentum.

As per always, corporate reporting season is believed to be all about corporate results, but it seldom is only about corporate results.

Dividends Are Back!

Apart from strong results and forward guidancefrom companies operating under robust operational momentum, such as mining companies, banks, building materials, financial services and platforms and discretionary retailers, the big positive surprise everybody is preparing for concerns dividends.

Australian investors traditionally enjoy the world’s most consistent and attractive cash dividends, but the past two years have brought about the rather unusual phenomenon of subsequent declining payouts, in particular from trusted income providers the Big Four Banks.

Insurance companies, energy producers, regional lenders and infrastructure owners have equally severely disappointed those shareholders looking out for their semi-annual or quarterly cash payouts.

Not to forget: the owners of shopping malls.

All are expecting to start paying a (higher) dividend again this year, and in the case of iron ore producers and major banks, expectations are building for a lot more than simply the return of juicy yield.

On current forecasts, ANZ Bank ((ANZ)), for example, will pay out 111.4c in total dividends for the year ending in September, which equals a yield of circa 4.4%. But the dividend is expected to grow to 128.9c next year, and that takes the implied yield beyond 5%, or what shareholders used to enjoy before the sector hit a snag or two.

For good measure: ANZ Bank paid out 160c in FY19, so there still remains a large gap to close with the prior trend, but expectations are building current estimates, even though on the rise, might prove too conservative and some of the banks might even have the luxury to pay out a special dividend or announce a share buyback.

For a sector that genuinely looked down and out one year ago, 2021 is likely to witness a remarkable come-back on the back of a much quicker recovery from the pandemic fall-out, plus banks stand to benefit directly from a steepening yield curve in bond markets.

The latter is one key reason as to why prior champion stocks including CSL ((CSL)), Xero ((XRO)) and Carsales ((CAR)) have found the going a lot tougher since October last year.

CommBank ((CBA)) is scheduled to report on February 10th. Market consensus is aiming at $1.44 in final dividend, but the market response is equally dependent on what Australia’s premium lender has to say about costs.

Iron ore producers know what it is like to operate inside the land of milk and honey. On my observation, most analysts are now reverting to yet another chapter of stronger-for-longer.

The Chinese would love to stick up their finger to Australia, as they have done through coal, wine, lobsters and other imports from the land Down Under, but they cannot unless they risk crippling their own economic recovery.

Part Two shall dig deeper into expectations for specific sectors and market segments, including analysts’ most favourite candidates for upward and downward surprises this month. See the FNArena website on Friday.

(*) Paying subscribers can access the archive of past Corporate Results Monitors via a dedicated section on the website:

https://www.fnarena.com/index.php/reporting_season/

The Monitor for February is now being updated daily.

February: Early Days, Full Of promise

By Rudi Filapek-Vandyck, Editor FNArena

Only in Australia, I think, can one be in the middle of reporting season, calendar-wise, but with only one-sixth of all companies having reported.

Or to put this in more concrete terms: by early March, when the current February corporate reporting will be done and dusted, FNArena expects to have updated on circa 318 ASX-listed companies.

Today, as I write this week’s Weekly Insights, February 15th, the total number of companies included in our daily Corporate Results Monitor still only tallies 52 companies.

I think everybody can do the math. There are more than 260 corporate results still waiting to be released, ex quarterly trading updates such as from the banks outside of CommBank ((CBA)) and Bendigo and Adelaide Bank ((BEN)), and ex the handful of companies that reported on Monday, today, and whose general assessment will be included in tomorrow’s Monitor update.

No, I have no clue either, other than that the skew towards the second half of each reporting season in Australia has noticeably worsened in recent years. This skew seemed logical when businesses were under the pump, forced to cut dividends and issue profit warnings, as they found it increasingly more difficult to live up to market expectations.

We should be edging closer to 100 by now, on pre-2019 schedules, but maybe Australian companies are simply finding it difficult to change the new habit?

Whatever the reason, investors will find out what is going on inside corporate Australia over the next two weeks. So far, the early numbers look very promising with the percentage of market beating financial results at roughly 55% and the percentage of clear disappointments at around 15.5%.

To put these numbers in context: total “misses” since August 2013 have never been below 19% and usually are in the low to middle 20s range while the best reporting seasons, September-December last year and March prior, generated exceptional numbers of 49% and 43% respectively.

It’s still looking very promising, but we have to take into account that on 52 companies thus far only, and with more than 260 yet to follow, today’s statistics can change quite dramatically. One observation to make is that some of yesteryear’s favourites are genuinely facing a much tougher environment in 2021 (see: Altium ((ALU)) on Monday) while negative secular trends remain the bugbear for owners of shopping malls and office properties, see Mirvac Group ((MGR)) and Unibail-Rodamco-Westfield ((URW)).

In between, a large number of companies are performing better-than-expected, forcing analysts’ forecasts higher. At least, this is the picture for the first two weeks of this February, on a thinner than usual sample.

A Different Environment For Dividends

The addition of Telstra ((TLS)) shares to theFNArena-Vested Equities All-Weather Model Portfoliohas led to a number of questions from readers and subscribers.

It is true, I am usually not a big fan of investing in low quality propositions, much preferring to avoid getting caught in something like Unibail-Rodamco-Westfield ((URW)) and then hearing management declare there will be no dividend for years to follow. Telstra shares have caused many a loyal shareholder continuous headaches for extended periods since its listing in the late 1990s.

As I have tried to explain since returning from the end-of-year break in January, this year’s prospect of rising global bond yields will have a direct impact on bond proxies and share prices of many an income providing stock in the share market. As such, it is my forecast that financials and industrials that are in a position to grow their earnings and dividends will prove a much better investment than most property owners or your typical REIT.

Following on from this forecast, the All-Weather Portfolio has reshuffled its exposure to dividend paying stocks, adding Telstra and Super Retail ((SUL)) while sticking with Aventus Group ((AVN)) and Waypoint REIT ((WPR)). Aventus Group has continued to perform strongly, while Waypoint REIT has clearly been impacted by the rise in global yields.

Investors should also note many of the stocks held in the portfolio are regular and solid providers of growing dividends, including Amcor ((AMC)), Iress ((IRE)) and Coles ((COL)) while, of course, the likes of CSL ((CSL)), ResMed ((RMD)), TechnologyOne ((TNE)) and REA Group ((REA)) equally pay out growing dividends, though their yields are too low to feature in any specific dividend-oriented investment strategy.

Telstra’s inclusion might well prove but a temporary decision, in that I believe the prospect of selling off equity in its towers and other infrastructure assets is minimising risk and most likely to unleash value for shareholders. It is on this specific consideration that Telstra is temporarily back in the portfolio, offering circa 4.7% yield after the recent share price appreciation. Lucky me, also, Telstra’s financial interim performance did not disappoint this time around.

The inclusion of Super Retail adds a high yielding stock that should be supported by the prospect of a prolonged period of buoyant consumer-related spending while, admittedly, also creating some overlap with one of my long-standing favourites, Bapcor ((BAP)).

As far as the All-Weather Model Portfolio itself is concerned, this is something we set up with a financial partner on an external platform (now: Wealth O2), so no specific details are available on the FNArena website. The Portfolio chooses from the same lists that are available through the dedicated All-Weather Stocks section on the website. It owns most, though not all of the stocks mentioned.

Sometimes an exception is made, as with Telstra and Super Retail, stocks that wouldn’t feature on my lists. I haven’t as yet figured out how best to communicate this switch in focus when it comes to dividend stocks, other than mentioning it here in Weekly Insights.

Suffice to say, while the five names mentioned under Dividend Champions on the website will continue to pay out dividends, and grow those dividends over the years ahead, with low risk of having to reduce or scrap payouts, they are unlikely to perform well if bond yields keep tilting higher.

This is the one perspective investors should simply be aware of.

February 2021: Banks Are Back!

In a reporting season that is about to beat all reporting seasons from the past ten years on important key metrics (see further below), thestand-out winners are Australian banks, showing investors the true meaning of “better-than-expected” with a glimpse of what old glory days used to be like.

The most remarkable achievement, probably, is that banks have become the main contributor to rising EPS growth forecasts in Australia, which is no mean feat considering the ongoing stronger-for-longer environment for the three large cap iron ore producers on the Australian stock exchange.

Banks and iron ore producers are at the forefront of what is characterising February 2021for Australian investors: financial results that beat market estimates, forcing forecasts to rise further, and with a strong come-back for large cash dividends.

All of BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) have surprised with much larger dividend payouts than had been expected. If the iron ore price retains its stronger-for-longer momentum, there should be more of the same in August and again next year, though most analysts would assume dividends will still fall from this year’s peak-payouts. These are commodity producers, after all.

No such holding back is prevalent when it comes to analysts’ views on Australian banks this season. If anything, many see plenty of opportunity and ongoing upside risks. The faster economic recovery on top of government support programs, combined with rising bond yields and a widening beneficial spread between short-term and longer-dated government bonds is turning banks into the undisputed winners of February 2021. If analysts’ forecasts are anything to go by, this sector revival has a lot further to go.

Not only are implied (forward looking) yields on bank shares already approaching levels similar to the good old days, with all three of the Majors outside of CommBank ((CBA)) now promising 5% or more (plus franking) on current share prices, analysts see excess cash and potential for special dividends on the horizon.

This truly is one remarkable come-back, if ever investors have witnessed one in Australia.

A Supercycle In Dividends

The best way to illustrate just how strong this February reporting season has been up to this point (Monday, 22nd) is throughequity strategists at JPMorgan. Before February, Jason Steed and Emily Macpherson had been expecting a strong turnaround in earnings and dividend expectations.

On Monday, the duo exclaimed: “The reality, thus far, has exceeded our elevated expectations.“

The team at JPMorgan is now predicting aSupercycle in Dividendsis building on the ASX. Their favourite seven names to invest in this new supercycle are: Fortescue Metals, Charter Hall ((CHC)), Rio Tinto, Super Retail ((SUL)), BHP Group, ANZ Bank ((ANZ)), and National Australia Bank ((NAB)).

Note: all seven stocks have been selected with a three-year horizon in mind (also showing how bullish above-consensus forecasts are at JPMorgan).

Last year, Australian yield-seekers were extra hard hit as companies cut dividends more dramatically than the average fall in profits, but this year that trend is reversing and, thus far, the comeback in dividends on average is far greater than the big recovery in profits. Citi points out miners including OZ Minerals ((OZL)) and Newcrest Mining ((NCM)) and scrap collector Sims ((SGM)) equally delivered positive dividend surprises this month.

Best Set Of Numbers In A Decade

Two sentences stand out in analyst research reports this month: “better-than-expected” and “best results season of the past ten years”. Macquarie has said it. JP Morgan has said it. And the numbers here at FNArena certainly back up that claim.

As of Monday, February 22, theFNArena Corporate Results Monitorcovers 155 earnings results reported and, on our assessment, 57.4% (89 results) proved better-than-expected, which is well above average of around 33%. Equally important, only 17 companies (11%) disappointed through missing market forecasts which is well below the percentages of past seasons (varying between 19%-37%).

Target prices have thus far risen by an average of 6.15%. In aggregate, targets are up 7.01% since the start of the month. Both numbers are near the highest increases recorded since 2013 (when FNArena started recording these stats).

One clear divergence from past seasons is that the numbers for the ASX50 are no longer lagging the numbers for the ASX200, which also shows the strong come-back from the banks. Of the 31 companies in the Top50 who have reported so far, 64.5% (20 reports) delivered a “beat” against 12.9% (4 companies only) missing expectations. For the ASX200 the corresponding numbers are 60.4% (58) and 11.5% (11) respectively.

Or to put this in the simplest lingo possible: beating expectations and forcing analysts to lift forecasts and valuations is no longer the sole domain of small and midcap technology companies alongside healthcare and REITs. As a matter of fact: the opposite is happening in this February results season when the likes of Altium ((ALU)) and Appen ((APX)) have been showing vulnerability and weakness, while trustworthy quality stalwarts including ResMed ((RMD)), CSL ((CSL)), and the ASX ((ASX)) have been noticeably out of favour, regardless of their financial performance.

The latter is not completely true. It has been more acase of: if ResMed comes out with another strong result, investors merely shrug their shoulders, and move on. But in case of the ASX, it appears nothing was going to be good enough to stop the slide in the share price. The ASX share price has now lost in excess of -20% since September last year, and it is far from the only victim from the market’s all-dominating switch in focus;away from covid-winners, towards covid-victimsthat stand to gain from this year’s global recovery.

Viewed from this angle, corporate results from the first three weeks of the February reporting season can be used as justification for the switch in market momentum in favour of miners, energy producers, banks and other laggards and cyclicals. Though that would be too simplistic a statement to make. The prospect of re-opening economies, and reviving social habits, on the back of vaccine roll-outs this year means investors are happy to buy and wait for the eventual recovery to play out, not disheartened at all by any delays that occur in the meantime.

Price action in the likes of Webjet ((WEB)) and Corporate Travel Management ((CTD)) is the tell-all within today’s context. It also once again shows that corporate performances are important, but expectations trump everything. February provides plenty of examples to back up that statement.

The main counter-argument to all of the above is that as of today, with only one more week left in this season, we are still only half-way through the total number of corporate reports for the month. I do think the current trends are too broad-based to reverse throughout the final week. In terms of combined market capitalisation for the companies that have already reported, we are well past the 50% and closer to the two-thirds mark (as also illustrated by 31 out of the Top50 companies having reported).

The Market Is A Duck Pond

The sharp rotation in a heavily polarised share market has turned the ASX into a duck pond. Viewed from the top, not much seems to be going on with the ASX200 meandering in between 6600 and 6900 with occasional a bit of heightened volatility because some hedge funds end up in trouble, but nothing much to upset the writers of tomorrow’s headlines.

Underneath the surface, however, quite a different spectacle has opened up. I already mentioned the ASX. Shares in Magellan Financial ((MFG)) have lost around one third since peaking upon the release of FY20 financial performance numbers in August last year. CSL shares are no longer that far off from the depth of the temporary panic selling carnage that occurred in March last year. It seems but a distant memory, but Appenshares rallied to near $44 in August last year (they are more than -50% lower today).

These are but a very select few of examples. Those investors keeping cash on the sidelines in anticipation of that big share market correction that needs to happen eventually might be missing the point. On my observation, that share market correction is happening in the here and now, but we need to look below the surface to see the damage and where it is taking place.

As per always, this extremely bifurcated market behaviour can inflict a lot of pain and gut wrenching despair for holders of impacted shares, in particular since the share market overall seems to be trending upwards, creating quite a pronounced gap between this year’s winners and laggards. The alternative view is, of course, that the market always does what the market does best, and that is exaggerating to the downside as much as it is likely exaggerating to the upside elsewhere.

In other words: opportunities are likely opening up for investors not necessarily looking to join today’s obvious momentum trade. Many of last year’s popular favourites are today trading at -12%, -16%, -20%, -25% below consensus price target. Sure, there might be a longer-lasting impact from the strong Aussie dollar and bond yields, they are on the rise, much quicker and steeper than most among us were anticipating only weeks ago, but many of today’s victims are high quality, solid business models with ongoing profitable prospects.

Within this context, I noteLongview Economicsrecently highlighted the fact US bond yields are approaching key technical resistance levels, probably indicating it is time for a pause and possibly a counter-trend move lower. Such a pause would provide a breather, if not more, for those prime victims that have seen quite the selling pressure descending upon them during the first two months of the new calendar year.

When Gold Meets Its Master

Talking about victims, has anyone else noticed those in favour of owning gold have gone really, really quiet of late. In fact, I hear more and more stories about your typical gold bug re-allocating money out of bullion and into crypto currencies.

Owning gold, and crypto currencies, is all about believing in the key narrative and in gold’s case one of the narratives that gets repeated over and over again is that it protects against inflation, which, of course, is something it doesn’t do, unless under the right circumstances.

Ultimately, gold’s direction is dependent on what happens in the US bond market. Yes, I am as surprised as most of you that this is almost never mentioned by most experts when talking about gold as an investment, or portfolio security for that matter.

In the current context, when inflation adjusted bond yields are negative but they might rise into positive territory as global inflation expectations are picking up, gold is not your watertight protector against price erosion through inflation. In fact, as clearly shown on backward looking price charts, gold in USD has done exactly what happened to share prices of the ASX, Magellan Financial, CSL, etc and that’s because they are all victims of the same source; rising bond yields.

Gold in USD peaked mid-last year above US$2000/oz and is now below US$1800, and in a visible down-trend. The reason as to why gold hasn’t fallen more thus far is because it is also a direct beneficiary of a weakening US dollar, which offers some form of compensation.

The team of technical analysts at Citi last week informed their clientele that were gold to close below US$1765/oz it would create a set-up similar to that of April 2013 when the precious metal lost -US$200 of its value in the course of three trading days.

Historical parallels don’t make for a guaranteed exact repeat, as we all should keep in mind. Regardless, I think the underlying sentiment remains correct: gold’s movement in 2021 is much beholden to whatever happens with US Treasuries. For some reason, crypto currencies have managed to steal some of gold’s narratives (alternative against floundering fiat currencies, protection against excessive money printing, etc) without the historical connection with real US bond yields.

No, I don’t know what that means either. And I certainly cannot explain it (other than, maybe, old world relic versus new world promise, maybe).

For those wanting to know more: I wrote a whole chapter on gold inWho’s Afraid Of The Big Bad Bear, available for all paid subscribers throughSpecial Reportson the website.

Bond Yields Won’t Rise Forever

As I have been writing since my very first 2021 market commentary in January, bond yields are the giant shadow lurking over asset markets this year. If they go up too high too rapidly equity markets will stumble, and possibly sell-off, but under a more mild scenario, which is what we’ve seen thus far, it’ll trigger a de-rating for most of the winners from the past years.

As bond markets are as much dominated by algo-trading, technicals and momentum followers as any public market these days, it is unfortunately not possible to make watertight predictions about how exactly this year’s scenario will unfold. But we’ve come a long way already with 10-year bond yields rising above 1.4% in Australia and the comparative yield in the US now above 1.3%.

Put a gun against any bond experts’ head and he/she will probably say:“I think around 1.50% this year“. (Assuming that’s the question you wanted to ask?)

The underlying message here is: bond yields won’t rise forever, and their projected move upwards won’t even happen via an uninterrupted, straight line. Thus there will be bargains and opportunities along the way.

One such example, I believe, this month is presented throughCharter Hall, whose share price has continued weakening ever since the start of the new calendar year. For good measure, Charter Hall is a diversified, extremely entrepreneurial and experienced property investor and developer, and there are weaker parts inside the group, but these should be more than compensated for through the booming parts, which includes the funds management and asset allocation.

These past two weeks or so the Charter Hall share price has literally weakened every single day. The price is now sitting on top of the simple 200 days moving average (for those who pay attention to these things). Of more importance, for how I look at the share market, the consensus price target is now more than 25% above the share price.

And that consensus price target is derived from freshly updated forecasts and valuations by analysts post a financial results release that not only beat market expectations, but also included an upgrade to full year guidance by company management that is by and large considered conservative by most analysts covering the company.

But the share price keeps falling every day.

It is this disconnect in a share market that is extremely focused on up-trending stocks, with no interest or attention to others, that has my personal attention this reporting season. Charter Hall is far from the only one whose performance and outlook are being ignored these days, but I am mentioning it because it has been included into the FNArena/Vested Equities All-Weather Model Portfolio, for the reasons mentioned.

A second reason is that I suspect the above mentioned strategists at JPMorgan made a mistake when they included Charter Hall in their list of most preferred dividend exposures for the upcoming three-year long supercycle. Looking into the finer details, I suspect they mixed up Charter Hall with Charter Hall Retail REIT ((CQR)), which is related though not quite the same.

Charter Hall Retail REIT offers a much higher yield of 6.6% for the running financial year, projected to rise to 7.1% in FY22. Sounds more like supercycle dividend material to me, but hey, I am now back on board with Charter Hall and I think that’s a keeper for the next three years too.

A February For The Record Books

It has been a while since a corporate results season in Australia was mostly about corporate performances. The last time this happened was, according to my memories, February 2018.

Back then, investors weren’t so sure whether strong share price performances for companies including Altium and Appen could be maintained, but their financial market updates proved the doubters wrong.

Every subsequent season since has been overshadowed by macro forces, albeit to different degrees and mostly through attempts to rotate away from Quality and Growth into Banks, Value and Cyclicals.

The February 2021 season has proved a little different. That oft attempted, but seldom sustainable market rotation into banks, miners and energy producers is by now five months old, and it has been solidified throughout the month with investors unambiguously showing their preference for share market laggards that stand to benefit from the rollout of vaccines globally and the re-opening of regional and international borders.

At times it was almost heartbreaking to observe how strong performances from covid-winners would receive no reward, at best, while for companies such as Webjet ((WEB)) and Flight Centre ((FLT)) it almost didn’t matter what financial results were being released as investors are keeping their attention firmly focused on the fact that global borders will re-open, exact timing unknown.

In 2021, the return of broad-based optimism about the economic recovery ahead has started to translate into higher bond yields which, in turn, have looped back into a weakening US dollar (stronger AUD) and a universal approval for investors to again start accumulating shares in small mining companies, banks, oil & gas producers, steel, construction and building materials, contractors and mining services providers, and other industrial cyclicals.

The sharp rise in bond yields was the big shadow hanging over February this year. Not only did it provide too big a headwind for most covid-beneficiaries, it also reignited market debate whether unprecedented stimulus and government support programs are heralding the return of consumer price inflation, which would justify even higher yields.

Central bankers joined the debate. They said: no, it doesn’t. The alternative view is that bond yields fell in 2020 because of the global pandemic and as market optimism grows, those yields are simply pricing out the virus impact. On the first Monday of March, the RBA used its money printing power to put a halt to what risked becoming an unruly trend that could well grow beyond control. The Fed had been signalling similarly on the final February Friday.

Whether this settles this debate once and for all is highly unlikely, but if the temperature on bond markets cools down, which would be the prime target for central banks the world around, then at least equity investors can start focusing again on corporate earnings, balance sheets, quality of business models, structural trends and valuations.

For investors, maybe the key challenge is to find a portfolio balance between direct winners from higher bond yields and this year’s economic recovery and those robust business models that might be temporary out of favour, also because they performed so well in the past, but whose runway for growth continues to be supported by new structural mega-trends and tectonic shifts into tomorrow’s technology-driven new economic reality.

Certainly, a less dominant theme of rising bond yields will much easier allow companies such as ResMed ((RMD)), Xero ((XRO)), Charter Hall ((CHC)) and Altium ((ALU)) to regain firmer footing, and thus investors’ attention.

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Having said all of the above, there is no denying a rather large number of highly popular, highly valued, strongly growing businesses have come up short these past few weeks, which has weighed upon share prices irrespective of bond market shenanigans.

The aforementioned Altium is one of them, but we can easily add a2 Milk ((A2M)), Appen ((APX)), Nanosonics ((NAN)), and many of the smaller cap technology sweethearts, including Aerometrex ((AMX)), Bravura Solutions ((BVS)), Catapult Group ((CAT)), Infomedia ((IFM)), ResApp Health ((RAS)), Temple & Webster ((TPW)), and others.

During a time when share market laggards -from the banks to Western Areas ((WSA)), and from Lynas Rare Earths ((LYC)) to Telstra ((TLS))- proved they are still worth investor attention, as long as the economic recovery remains on schedule, many of the former can-do-no-wrong share market darlings revealed some of their own vulnerabilities and weaknesses. When taking a broad view, this even includes Australia’s Champion among Champions, CSL ((CSL)).

No doubt, for some investors this has further galvanised their appetite for more cyclicals and less Quality, Defensives and Growth, but one needs to keep in mind the theme of backing last year’s covid-victims will run its course at some point, while central banks remain convinced there is no sign of sustainable inflation on the horizon. I also believe there is one important message that should not be ignored from several of this season’s failures, and that is that disruption and tectonic shifts that used to dominate the landscape until late last year are still around.

Beyond the short-to-medium term focus of the market sentiment pendulum, those shifting tectonic plates will continue to challenge moribund, under-invested business models even though there is equally a valid argument in that the accelerating shift towards decarbonisation of economies is creating a whole set of fresh dynamics, while it should be easier for companies to restructure, re-align and reinvent themselves when economic growth is strong (or so goes the theory).

Every reporting season opens up a list of major failures and disappointments and this time AGL Energy ((AGL)) delivered one of the eye-catching, negative performances. Investors best not be bamboozled by the seemingly high dividend yield on offer. AGL’s share price has been in decline for over four years as the power network operator and electricity generator struggles to combine old world coal fired power stations with new world renewables and the need for more grid flexibility. It is but an existential dilemma for all to witness; one that is unlikely to be resolved by simply separating the dirty coal operations.

In the same vein, Unibail-Rodamco-Westfield ((URW)) might be the proud owner of several of the highest quality shopping malls around the world, but burdened by too much debt, lockdowns, the shift to online and the threat of ongoing asset devaluations, management’s task of manufacturing a successful transformation is not being made any easier, irrespective of this year’s recovery. Those who jumped on board because of the perceived value in the assets, while the shares looked exceptionally cheap, are now facing the prospect of two years of no dividend payments.

Another one of February’s spectacular disappointments was delivered by machine learning and artificial intelligence data and services provider, Appen. While the need for such data and services will remain high in the years ahead, Appen’s small base of key customers seems to have injected more price competition among suppliers and Appen, valued as a high growth company with sheer unlimited potential, has felt the repercussions through a gigantic share price devaluation, taking the price down by more than -50% since August last year but, and this remains the sad indictment for those who are still holding on, with ongoing risk for further negative surprises.

Investors equally did not respond in kind when Coles Group ((COL)) suggested it had to invest more to future-proof the business, while growth might temporarily turn negative when compared to last year’s big boost from covid lockdowns. As such, the supermarket operator might as well have rung the bell for last year’s covid beneficiaries in general which are facing tough comparables to beat in 2021, while the opposite remains the case for last year’s laggards including the banks, who managed to crown themselves as the Super-Duper Come Back Kids in February, with ongoing promise of higher dividends, and even special payouts, as the recovery materialises.

All in all, it has to be said, February delivered very few true disappointments, unlike most reporting seasons. After combining 335 reporting companies over the month, the FNArena Corporate Results Monitor has placed less than 12% (40 companies in total) in the sin bin for missing market expectations, and many of those are perennial underperformers and repeat offenders, including Ardent Leisure ((ALG)), iSentia ((ISD)), 3P Learning ((3PL)), Cimic Group ((CIM)), and Humm Group ((HUM)).

The local technology sector was a magnet for reductions in forecasts this season.

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At the other end of the spectrum, 160 companies, or nearly 48% beat market expectations and that’s an achievement we have never witnessed since we started keeping reporting season statistics here at FNArena. Or have we? Strictly taken, last year’s 49 reporters in between September and December generated 49% “beats” but also 29% in “misses” so I think we can still callFebruary 2021 the best reporting season in Australia post-GFC.

It can also be argued both seasons are two peas from the same pod, so to speak. Usually the percentage of beats ranges between 24% (bad) and 38% (very good).

Banks, Materials (ex-mining), Insurance and Retailers enjoyed the strongest forecast upgrades over the season. Analysts at Macquarie believe the first three will continue to benefit from improving global growth and vaccines, while retailers will face headwinds due to vaccines and spending being redirected back to services, which explains some of the hesitant share price movements post results.

On Macquarie’s analysis, “true” upgrades were delivered by Nine Entertainment ((NEC)), Bendigo & Adelaide Bank ((BEN)), Suncorp ((SUN)), Treasury Wines ((TWE)), BlueScope Steel ((BSL)), JB Hi-Fi ((JBH)), Woolworths ((WOW)), Northern Star ((NST)), Wesfarmers ((WES)), Star Entertainment ((SGR)), Tabcorp Holdings ((TAH)), Vicinity Centres ((VCX)), Commbank ((CBA)), Boral ((BLD)), and Seek ((SEK)) among the ASX100 companies.

Outside the ASX100, the analysis identified Lovisa Holdings ((LOV)), Nearmap ((NEA)), Pinnacle Investment Management ((PNI)), Codan ((CDA)), Platinum Asset Management ((PTM)), Sims ((SGM)), nib Holdings ((NHF)), Pact Group ((PGH)), Seven West Media ((SWM)), ALE Property ((LEP)), Estia Health ((EHE)), Nick Scali ((NCK)), Cooper Energy ((COE)), Mayne Pharma ((MYX)), ARB Corp ((ARB)), and Wagners Holding Company ((WGN)).

I don’t want to be super-mean about Wagners, but any objective observer will agree with me it hasn’t been a great success since listing on the ASX. The fact this company is being nominated as one of the stand-out positive performers in February shows us all these are all but unusual circumstances.

The minor disappointment is both numbers for beats and misses looked simply spectacular throughout the opening two weeks of February. In particular the number of beats shrunk noticeably as the end of the season approached. Note to myself: companies that are ready to release not-so-fantastic results prefer to hide in the later parts of the season. Overall, however, earnings growth projections rose throughout the month (usually they fall during reporting season) with iron ore miners and banks major contributors.

The average individual target price increase was 5.64% while all 335 targets in aggregate rose by 6.29%. These are not the highest increases on record, but still high.

If it wasn’t for the acceleration in bond market sell-offs (yields rallying higher), investors might have enjoyed stronger and longer-lasting share price responses to match February’s above-average outcome. At the same time, it’s good to remind ourselves expectations were low across the board and many businesses responded to last year’s challenge by cutting back on expenses, including capex in many cases, while also enjoying extraordinary support through rent relief and the federal government’s Jobkeeper program.

And while market strategists at Macquarie believe many of this season’s surprises were caused by higher-than-forecast profit margins, supported by better-than-anticipated sales and revenues, the December quarter business indicators in Australia, released on Monday, revealed company profits fell sharply by -6.6% as government stimulus payments ceased.

Even though some economists had penciled in a potentially worse outcome, this extra data insight can serve as an unofficial warning this is by no means a time to allow complacency to creep in.

(Do note that, in line with all my analyses, appearances and presentations, all ofthe above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)

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