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Rudi’s Comprehensive August 2023 Review

Feature Stories | Sep 21 2023

This story features COLLINS FOODS LIMITED, and other companies. For more info SHARE ANALYSIS: CKF

Download related file: FNArena-Reporting-Season-Monitor-August-2023

A compilation of stories relating to the August 2023 corporate reporting season in Australia, including FNArena’s final balance for the season.

Content (in chronological order of publication):

-Earnings Forecasts: Low Expectations Not Low Enough?
-Conviction Calls & Best Ideas
-Opportunities With A Five Year Horizon
-Company Reports: Early Trends
-Company Reports: Inflation
-Company Reports: Conviction
-Company Reports: Technology Sector
-REITs In Focus
-Awaiting The August Verdict
-Conviction Calls and Best Ideas
-August Results: Early Observations
-Conviction Calls and Best Ideas
-Rudi Interviewed: Have Cash, Can Be Patient
-August Results: Early Observations
-August Signals: Resilience Shines, Forecasts Slide
-Outlook Negative, With Plenty Of Silver Linings
-Conviction Calls & Best Ideas
-August 2023 – Winners & Losers

-Navigating The Post-August Complexities
-Best Ideas and Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Earnings Forecasts: Low Expectations Not Low Enough?

There's no denying, in the slipstream of more resilient economic data and indicators, corporate profits have equally proven to be more resilient in this cycle than many had thought.

In line with a positive share market interpretation of lower bond yields (see above), this has been one of the pillars underneath a supportive share market story year to date in 2023.

In addition, and this in particular applies to the Australian market, analysts' forecasts are low, and falling, suggesting companies only face a low hurdle in order to meet or beat expectations in August. Consensus has the average EPS growth well below average, with negative growth projected for FY24.

But it never is this simple and there is one important reason as to why the bar seems so low for Australian companies this August and for the year ahead: companies are doing it tough and overall conditions are expected to worsen further, before they can start to recover. Central bank tightening works at considerable delay. The local mortgage cliff has only just started to impact. Supply chain bottlenecks are still a recent memory. Inflation is still a negative factor.

In the US corporate profits have fallen by circa -8% on average over the twelve months past, so there is undeniably a visible recession at the corporate level, it's just not apparent from how major indices have performed to date. Then those indices are carried by only a small group of outperformers, with markets underneath characterised by extreme polarisation.

At the very least, such a set-up suggests a one-size-fits-all, generalised approach might not be the appropriate one for equities this time around. Shares that have experienced a big rally this year might require that companies do better than simply meeting expectations, a fact that applies more to the USA than it does for Australia, but history shows there will be winners and losers at either end of the market.

Before we start digging into the finer details for upcoming releases, let's briefly reflect on what occurred earlier this year during the local February reporting period.


This year's February results season in Australia took place at the pointy end of a very strong rally from beaten-down levels in late 2022, and it soon became obvious Australian companies had landed in Struggle Street. Corporate results did not shine, on average, and instead provided plenty of reasons for share market momentum to deflate.

As I wrote in early March:

"February wasn't great – not when we zoom in on corporate profits, underlying trends and margins; even the most bullish among the bulls might have to concede as much. February has turned into a thorn in the side for all those forecasters who believe the low is in for markets and a new bull market is taking shape."

The big takeaway from that season, I believed, was that no less than 49% of reporting companies require a pick-up in the second half to meet either their own guidance or market forecasts in August. Investors have since witnessed the return of the annual confession season whereby management teams concede they won't meet targets or expectations.

When we consider the magnitude of that percentage, it is probably half a miracle confession season to date hasn't brought out more warnings and brutal reassessments, but it's good to keep in mind companies are allowed a margin of 15% before they are required to release an official ASX update.

The benign character of confession season thus far can still be explained in multiple ways, including the scenario whereby companies might just keep the disappointment until the day of result release.

On FNArena's number-crunching, more reports disappointed than those that beat forecasts -32.5% versus 29.5%- but equally important; one-in-five companies in February reduced their dividend for shareholders. That twenty percent of dividend reductions is equally a big number.

Ominously, the two sectors that delivered major upside surprises in February were discretionary retailers and REITs – the two sectors that have since suffered the most as downward pressures revealed themselves later on. Equally surprising: CSL ((CSL)) was at the time nominated as having delivered one of the stand-out financial performances in the month, yet four months later management issued a profit warning which has pulled down the share price to a level last seen in early 2022.

All in all, most experts labeled corporate Australia's results at the time as a "mixed bag" and even without a subsequent crisis for regional banks in the US, it was obvious operational results were simply not good enough to support ongoing market enthusiasm, generally speaking.


Fast forward to mid-July, less than a full month from when the local tsunami hits the ASX, and profit forecasts have been reduced noticeably while the likes of Amcor ((AMC)), CSL, KMD Brands ((KMD)) and others have updated with disappointing numbers and forecasts, but nothing like what was possible in terms of worse case scenarios.

Irrespective of reductions to date, just about every expert across the globe maintains analysts' forecasts are still too generous, both in Australia and elsewhere. It has also been observed profits in Australia yet again appear more vulnerable than elsewhere. Is this because of the high concentration in banks and resources?

This higher vulnerability did inspire global strategists at Citi to put Australia in the Underweight basket. Citi is positive on global share markets with the in-house view anticipating economic recessions and relatively resilient corporate margins and profits, but Australia is considered too weak in realistic prospects to join in Citi's cautious optimism.

Before anyone has the wrong idea: Morgan Stanley's conviction remains most economies, including the USA, will escape economic recession, but corporate margins will lose their lockdown premia and thus profits are poised to surprise on the downside, expected to pull equity markets down with them in the process.

As the saying goes: it's complicated.


With EPS growth hard to come by, and dim-looking prospects for the year ahead, UBS analysts have identified four questions that are likely to colour the upcoming season in Australia:

-Is the consumer crunch now happening?

-Are labour costs beginning to break out?

-Can profit margins be maintained?

-Are interest expenses manageable?

The broker's suspicion is trading updates that often come attached to financial releases might look decidedly 'bleak'. The unemployment rate remains near an historical low. With the average wage bill projected to increase by 10% annualised, corporate costs might feature as a major headache next month.

Shorter-dated bonds have risen significantly in the year past, suggesting companies are poised to report higher-than-expected interest expenses. Profits might feel the pinch both from rising costs and from declining sales, even if companies can keep their margins intact.

Given the subdued macro-outlook and context, UBS's expectations for August are low. "We see the ASX as flush with companies that have promise and opportunities, but upbeat stories are likely to be largely dismissed over the next month. Instead, attention will focus on a decelerating economy, a strained consumer, and the lagged effect from the Reserve Bank's hiking cycle which began a year ago."

Against a background of negative EPS growth locally, current market forecasts are for average 10.9% EPS growth for the world, with 9.8% growth for developed markets and 18.1% for emerging markets. The corresponding number for Australia, as things stand, is negative -3%.

A closer look into the underlying components does reveal Australia's growth prognosis is heavily weighed down by the energy sector, at arm's length followed by still negative forecasts for materials (miners) and financials (in particular: the banks) whereas utilities, healthcare, industrials, IT and communication services all seem poised for strong, above-average growth.

As per always: the devil is in the detail. A heavily bifurcated market is like a knife that cuts both ways. Local strategists at Morgan Stanley already made the point the Australian economy is running on variable speeds, with tighter conditions having the most impact in Victoria. This might add a regional flavour on top of your usual sector and corporate quality qualifications.


Having said this, the main question at the macro level remains the same: how bad exactly can/will things become?

Market strategists at Macquarie would probably answer that question with Bachman Turner Overdrive's You Aint Seen Nothing Yet. Unlike the meme, it looks like Godot finally arrives in FY24, the strategists declared in this week's preview to the August reporting season.

If Macquarie is correct, investors are drawing the wrong conclusions from resilient markets up to this point. It's a slow-moving process, but this still implies the worst is yet to come. By year-end, predict Macquarie strategists, the consensus FY24 EPS growth forecast will be closer to -10%, implying things will worsen a lot, and rapidly too, in the months ahead.

Macquarie reminds investors in August last year twice as many companies guided below consensus forecasts, which translated into negative share price outcomes. Were this to repeat for defensive and growth companies this year, Macquarie will be ready to start buying their shares.


Recent optimism in the US seems to be based upon market forecasts stabilising and even spreading out over a slightly larger group of companies. This has been interpreted as an early signal the US recovery is broadening into a broader base of companies.

On current forecasts, American corporate profits are set to trough in Q2, which is the current reporting season over there, with an uptrend to resume from the current quarter onwards.

Plenty of sceptics around to keep overal doubt up. Here's the take from ClearBridge as published by FNArena on Friday:

Sceptics at Morgan Stanley summarised the Bull and Bear cases as follows:

The Bull Case

-Soft landing appears obvious
-Corporate profits 'fine'; rebounding
-Labor markets are strong but not wage inflationary
-Fed rate cuts imminent despite no pause and no cuts forecast until 2024
-Cash on sidelines is too big and impatient

The Bear Case

-Policy operates with a lag; economy slowing
-Peak company margins unsustainable
-Falling inflation cuts both ways; negative operating leverage
-Recession indicators are screaming
-Regional bank stress has implications for lending standards
-Debt ceiling is source of US$650bn liquidity drain
-The passive indices are overvalued; stock concentration raises idiosyncratic risk
-Rates are not returning to pre-covid lows; the Fed will fight the market

Morgan Stanley's conclusion: "our conviction is not wavering".

One of the key factors that has the strategists attention are inventories, which in multiple sectors currently look bloated, though Morgan Stanley describes them as "extremely elevated" and "a broad-based problem".

The thinking is that with the release of supply chain pressures, and the fall in inflation, coupled with decelerating economic momentum, companies will lose their pricing power at a time when they need to reduce bloated inventories. It doesn't take too much imagination to see how this can quickly escalate into broad-based negative news.

Morgan Stanley doesn't think technology companies will prove immune either.

On the broker's data crunching, inventory-to-sales remains elevated at the S&P1500 level, especially in semiconductors, capital goods, and technology hardware industries.


In terms of sector outlooks for the ASX, the key questions for the banks remain how bad exactly the impact from the mortgage cliff and household spending pressures can become, and whether this is already accurately reflected in today's share prices?

In contrast, insurers, the other major segment that sits under the general label of Financials, are currently riding the benefits from a prolonged upswing in market conditions, with each of general insurers, health insurers and insurance brokerages enjoying rising forecasts and broad support from sector analysts.

General sentiment for minerals and metals remains contingent on Chinese stimulus, or more accurately: the market's expectations of it, while on the operational side persistently higher costs will put a dent in many a producer's margin. In the energy sector, it's probably not a coincidence the sector laggard, Santos, is now everybody's top pick.

Discretionary retailers face the same investor dilemma as the banks: bad news has to a degree already been priced-in, sector-wide, but is it enough?

The local healthcare sector is singled out as the obvious 'go to' by most strategists given share prices have lagged over quite some time, the industry is packed with robust, high quality business models with international allure and the ability to keep growing during times of economic duress, and market leader CSL has already issued a profit warning, with the subsequent market punishment executed.

All shall be revealed in the six weeks ahead. Strap yourself in. This won't be a relaxing walk in the park.

Conviction Calls & Best Ideas

Both strategy teams at Macquarie and UBS continue singing from the same hymn sheet in the lead-in to the August reporting season; defensive sectors that can withstand economic recession remain high on the most preferred wish list.

UBS explains this puts the focus on technology, insurance and healthcare, but also on reliable and stable dividend payers, which includes companies in infrastructure, utilities and insurance sectors.

Macquarie's favouritism for sturdy defensives puts the focus on general insurers, but equally on healthcare, infrastructure and utilities, and telcos.

Technology sector analysts at Goldman Sachs have used yet another sector update to elevate Macquarie Technology ((MAQ)) to the broker's Conviction Buy list with cloud services providers in general preferred over hardware manufacturers in the sector.


Morningstar's selection of Best Stock Ideas for Australia and New Zealand has seen two amendments recently with the inclusion of car parts distributor Bapcor ((BAP)) and the removal of InvoCare ((IVC)).

The latter is still on the menu of foreign suitors, though Morningstar is not happy with the offer that's on the table. Irrespectively, there are better and cheaper alternatives out there, the stock pickers suggest, including Bapcor.

Other names on the list:

-AGL Energy ((AGL))
-The a2 Milk Co ((A2M))
-Aurizon Holdings ((AZJ))
-Fineos Corp ((FCL))
-Kogan ((KGN))
-Lendlease ((LLC))
-Newcrest Mining ((NCM))
-TPG Telecom ((TPG))
-Ventia Services Group ((VNT))
-Westpac Bank ((WBC))
-WiseTech Global ((WTC))


Over at Wilsons, the selected list of Most Preferred Direct Equities exposures has been enlarged with the addition of South32 ((S32)).

Others that have kept their inclusion:

-APA Group ((APA))
-IDP Education ((IEL))
-Mineral Resources ((MIN))

In addition, Wilsons' research also suggests shares in Select Harvests ((SHV)) have been oversold.

The team has also identified a number of long-term structural growth stories whose share prices are offering attractive entry points to what are considered quality companies:

-Aroa Biosurgery ((ARX))
-Lovisa Holdings ((LOV))
-Ridley Corp ((RIC))
-Siteminder ((SDR))
-TechnologyOne ((TNE))
-Tourism Holdings Rentals ((THL))

For those looking for more speculative opportunities, Wilsons has put forward two names:

-Immutep ((IMM))
-Neuren Pharmaceuticals ((NEU))

The latter has gone for a big run prior to the publication of today's update.

For ideas inside the resources sector, Wilsons has its eye on Beach Energy ((BPT)) and Leo Lithium ((LLL)).

Opportunities With A Five Year Horizon

Most investors like to profess they are in it for the long term, but let's be brutally honest: we are all influenced by what happens in the here and now, irrespective of what the consequences might be in the long run.

Which is also why my own investor heart tends to skip a beat whenever an experienced market researcher makes the effort to identify great opportunities with a longer term focus.

At the very least, in my humble opinion, such research offers the rest of us mere mortals with valuable input to think about, detached from the immediate and daily share price movements.

One extra observation to throw in the mix: whenever analysts try to identify great longer-term investments, they mostly end up overlapping each other's selections, with personal preferences often creating the minor differences.

Wilsons' latest effort fits in almost perfectly with my own research into All-Weather Performers on the ASX.

Last week Wilsons published a list of five stocks for the next five years; a small selection of genuine bottom-drawer stocks, that can be owned and trusted to reward shareholders over the next five years, at least. The selection is supported by attractive structural trends such as healthcare innovation, energy transition, cloud computing, and financial industry disruption.

The five companies selected because, in the words of Wilsons, they deserve a place in every investor's portfolio, are CSL ((CSL)), Macquarie Group ((MQG)), Netwealth Group ((NWL)), NextDC ((NXT)), and Worley ((WOR)). Three of those are currently held in the FNArena/Vested Equities All-Weather Model Portfolio.

Other attractive long-term buys, according to the same analysts, include APA Group ((APA)), Aristocrat Leisure ((ALL)), Goodman Group ((GMG)), James Hardie ((JHX)), IDP Education ((IEL)), The Lottery Corp ((TLC)), ResMed ((RMD)), Telix Pharmaceuticals ((TLX)), and Xero ((XRO)).

More overlap.

Paying subscribers have 24/7 access to a dedicated section on the website on my research into All-Weather Stocks:

Company Reports: Early Trends

The focus of investors will increasingly shift towards corporate earnings and their likely outlook, both in Australia and overseas, though the macro picture consisting of central bank actions, China stimulus, bond yields and economic indicators will still be ever-present.

Thus far in 2023, equity indices like to rally on macro-influences, while corporate earnings have not genuinely followed suit, even though there has been no fall-of-the-cliff experience either.

The Australian share market has seen the return of Confession Season, when companies confess they won't make the target for the financial period, but it hasn't been an all-out tsunami of negative announcements.

Companies that came clean over the weeks past have seen their share price fall in response, at times by -10% or more, including the likes of Ansell ((ANN)), Aurizon Holdings ((AZJ)), ASX ((ASX)), Boral ((BLD)), Cleanaway Waste Management ((CWY)), CSL, Johns Lyng Group ((JLG)), Link Administration ((LNK)), Northern Star Resources ((NST)), and Domino's Pizza ((DMP)).

There have been the occasional good news surprises, including from AGL Energy ((AGL)), Ampol ((ALD)), Fletcher Building ((FBU)), and Megaport ((MP1)).

The two lists might not be complete, but I think it's fair to say the bias is leaning towards the negative.

The mining sector certainly is generating its own negative contributions as also witnessed on Monday with South32 ((S32)) flagging a record -US$1.3bn asset write-down, hot on the heels of IGO Ltd's ((IGO)) substantial write-down in the week prior, and Core Lithium ((CXO)) downgrading production guidance.

Ship builder Austal ((ASB)) has requested a trading halt, potentially to downgrade market expectations.

Most strategists in Australia seem to be cautious at best. See also last week's edition:

Over in the USA, EPS forecasts are dropping quite rapidly as early Q2 financial reports are being released. It wasn't that long ago the average EPS forecast for the quarter for the S&P500 was sitting at a negative -7% year-on-year. That percentage has over the past two weeks or so quickly dropped to -9%.

It's still early in the season, of course, but positive surprises thus far amount to 75% of reports versus a five-year average of 77%.

What should genuinely worry investors in Australia is how earnings releases in general are being received on Wall Street and in Europe. Market watchers have been observing the trend tends to favour share prices to underperform when companies miss the mark while companies that beat expectations are not necessarily receiving a reward for it.

It also seems the bias has shifted towards more 'misses' and fewer 'beats'. The punishment for a 'miss' tends to be noticeably larger than the reward for a 'beat'.

If Europe is leading Australia, the following trends should be expected to show up locally:

-Momentum is slowing, feeding into more cautious guidances and ongoing downgrades in earnings forecasts
-Less companies are able to beat market forecasts
-Large cap companies are faring noticeably better than smaller cap peers
-Cyclical sectors Energy and Materials are among segments with the weakest earnings trends, but so are Growth companies

The Q2 season in the US has only just begun, but similar observations have been made.

Reporting season in Australia starts unofficially on Wednesday, when Rio Tinto ((RIO)) sets the early tone, followed the next day by Champion Iron ((CIA)), Garda Property Group ((GDF)) and Sandfire Resources ((SFR)).

The following week sees financial updates released by Credit Corp ((CCP)), Janus Henderson ((JHG)), Block ((SQ2)) and ResMed ((RMD)) but, realistically, the August reporting season only starts ramping up the week after next week.

Even then, as has become the local tradition, Australian companies wait until the middle of the month has passed, and only then a true tsunami of corporate updates will be unleashed upon investors and analysts. Many of the small cap companies, those with not great results in particular, wait until the final days of the season.

FNArena will be keeping a close eye, as has become our own self-made tradition since mid-2013. Our dedicated Corporate Results Monitor will be brought to live by the end of this week:

(The Corporate Results Monitor also includes a calendar for the season).

Company Reports: Inflation

Blame it on excess government support, a resilient consumer, or a this-time-is-different cycle, but resurgent inflation has equally been a supporting factor for corporate results over the year past.

When inflation runs high, many a company finds it much easier to justify a price increase to its customers, even if the latter feels the pain. And as we all live in a nominal world, high inflation also acts as an artificial growth engine; even when customers are ordering less, the increase in prices tends to still lift overall sales and revenues at the top line.

With inflation deflating, as is undoubtedly happening at the moment, achieving growth becomes more difficult for companies. Many will be facing price decreases instead, and with economic momentum slowing, there no longer is an automatic rise in nominal sales and revenues.

Some industries will be faced with too-high inventories and an urgency to ship out products and services through discounted prices.

At the macro-level, falling inflation should see central bankers relax and pause, and bond yields trend lower, which supports higher valuations for listed assets.

Exactly how this combination of negatives and positives from receding inflation will play out is anyone's forecast, but a worst case scenario would imply that higher valuations are already in place, while slower growth still needs to be accounted for.

The Australian share market is currently trading near or above its long term average PE ratio, depending on whose number crunching we rely on. But strip out banks and resources and Shaw and Partners' CIO Martin Crabb believes the average PE ratio is around 20x next year's forecast EPS – not cheap by anyone's account.

All else being equal, companies might have to convince the market they are truly worth the multiple they are trading on, even with lower bond yields potentially providing valuation support (in a general sense).

Company Reports: Conviction

It's never easy or straightforward to know in advance which companies won't disappoint in August, but Morgan Stanley analysts have identified ten ASX-listed companies that come with High Conviction attached:

-Atlas Arteria ((ALX))
-Cleanaway Waste Management
-Corporate Travel Management ((CTD))
-Goodman Group
-McMillan Shakespeare ((MMS))
-Medibank Private ((MPL))
-Orora ((ORA))
-Telstra ((TLS))


Strategists at Morgans suggest corporate earnings look vulnerable ahead of August, with investors' attention not simply focused on FY23 results, but probably more so on the outlook for FY24.

Key themes to watch, according to Morgans, are the underlying trend for earnings, higher interest costs, cyclical signposts (consumer demand, industrial margins), small cap performance, short selling and investor positioning in resources.

Morgans has lined up a number of key tactical trades for the season at hand (positive outcomes expected):

-Flight Centre ((FLT))
-Lovisa Holdings ((LOV))
-Medibank Private
-QBE Insurance ((QBE))

As debt financing costs will come under scrutiny, Morgans sees risk rising for:

-Amcor ((AMC))
-Aurizon Holdings
-Costa Group ((CGC))
-Cleanaway Waste Management
-Cromwell Property Group ((CMW))
-Domino's Pizza
-Star Entertainment Group ((SGR))
-Wagners Holding Co ((WGN))

Also at risk for delivering disappointment:

-APA Group
-ARB Corp ((ARB))
-Treasury Wine Estates ((TWE))
-Transurban ((TCL))

Have been identified for potential upside from capital management:

-Computershare ((CPU))
-Suncorp Group ((SUN))
-Super Retail Group ((SUL))

Costa Group and Iress ((IRE)) have been singled out for potential balance sheet risk.

Company Reports: Technology Sector

One sector that might have to justify this year's share price performances more than others is the local technology sector.

One exception, possibly, suggest analysts at Jarden, are the payment processors with share prices for the likes of Zip Co ((ZIP)) and Tyro Payments ((TYR)) still suffering from prior Afterpay-led exuberance.

Jarden believes investor focus will be on delivery of cash flows and specific outlook commentary, including cost containment and the way to reaching break-even.

As things stand towards the end of July, Jarden only has one Buy rating left for the sector in Australia, for SiteMinder ((SDR)). Four other stocks are rated Overweight (one step below Buy): WiseTech Global ((WTC)), Xero, REA Group ((REA)) and Seek ((SEK)).

Sector analysts at Goldman Sachs recently used an update specific to IT services to reiterate their preferences for Macquarie Technology ((MAQ)) and Data#3 Ltd ((DTL)).

REITs In Focus

One market segment that has experienced a tough time during covid and lockdowns, and then on higher bond yields, under-utilised offices and a slowing in consumer spending are real estate investment trusts.

AREITs are not immune to rising costs, including for servicing debt, and many might find themselves without much organic growth for the year(s) ahead. One can see the general theme already: stockpicking is critical!

Sector analysts at Jarden's preference lays with those who appear to have the strongest growth prospects; Goodman Group, Scentre Group ((SCG)), National Storage ((NSR)), Arena REIT ((ARF)), Vicinity Centres ((VCX)) and Lifestyle Communities ((LIC)).

General apprehension towards the sector has made a few looking very cheap, which is equally attracting Jarden's attention: Region Group ((RGN)), Charter Hall Retail REIT ((CQR)) and HomeCo Daily Needs REIT ((HDN)).


Analysts at Macquarie, where the in-house view remains that Australia is facing economic recession, remind investors REITs typically underperform in the early contraction stage of the market cycle. Hence Macquarie's preference for the more defensive exposures in the local sector.

Macquarie's preference lays with Goodman Group, GPT Group ((GPT)), Dexus ((DXS)) among large caps, and Centuria Industrial REIT ((CIP)), Arena REIT and Qualitas ((QAL)) for smaller cap exposures.

For investors worried about potential balance sheet risks, Macquarie is most cautious on Charter Hall Long WALE REIT ((CLW)), Scentre Group, and Lendlease.


Ord Minnett remains cautious on office assets, with property valuations in general (read: devaluations) potentially a key factor in August, together with debt profiles and tenant demand in the wake of higher costs. AREITs will need to show fresh initiatives to convince investors they are not ex-growth, suggest the analysts.

Ord Minnett is supportive of landlords of convenience shopping assets, expecting Charter Hall Retail REIT, HomeCo Daily Needs REIT and RAM Essential Services Property Fund ((REP)) to report solid operating results.

The broker's Top Picks are Waypoint REIT ((WPR)), Dexus Convenience Retail REIT ((DXC)), and RAM Essential Services Property Fund.


Morgan Stanley states AREITs were traditionally seen as providing relatively steady outlooks for investors, but this has changed in recent times. Hence, those who still can provide stable outlooks are likely rewarded with a valuation premium, the broker suggests.

AREITs best placed to present investors with a stable performance plus outlook in August, according to Morgan Stanley, include Goodman Group, Scentre Group, and Vicinity Centres.

Risk to specific guidances are considered for Mirvac Group ((MGR)), Stockland ((SGP)), Charter Hall ((CHC)), Dexus, and Centuria Office REIT ((COF)).


UBS's sector preferences reside with "REITs with business models suitable for either a 'higher for longer' rate environment or with robust cash flow growth in a period of economic weakness."

UBS's most preferred exposures are Goodman Group, Mirvac Group, GPT Group, Lendlease, HomeCo Daily Needs REIT, Centuria Industrial REIT, and Lifestyle Communities.

The broker's list of least preferred REITs include Scentre Group, Vicinity Centres, Dexus, Charter Hall, Region Group, BWP Trust ((BWP)), and Ingenia Communities Group ((INA)).

Awaiting The August Verdict

It's by no means a perfect relationship, but earnings forecasts in Australia are tumbling in seldom witnessed fashion while key indices are threatening to set new highs for the year.

If investors are looking for a genuine reason to be worried, the gap that is opening up between these two might just be the appropriate concern.

But it is and remains a heavily polarised share market and thus general averages only tell half of the story, at best.

At face value, corporate profits in Australia have proved more vulnerable than in overseas markets, Europe and the USA included, and the prospects for the year ahead suggest the pressure is on with the aggregate EPS forecast for the ASX200 now firmly in negative territory for FY24.

One look into the finer details, however, quickly reveals this negative outlook is closely correlated with the local share markets' heavy weighting towards resources companies and banks. This does not erase the fact that things are getting tougher for many companies in many industries.

The general mood among local share market forecasters ahead of the August season is cautious, also because overseas companies that manage to beat forecasts are not necessarily rewarded with a higher share price.

Analysts at Macquarie believe a close relationship seems to be forming as to how share prices perform ahead of each financial report; did the share price rally in advance? A weakening should be expected post release. Did the share price lag ahead of the release? The odds are in favour of a share price rally post event, even if the result itself is a "miss".

The upcoming August reporting season will also mark a trend reversal in local dividends as super payouts from the iron ore producers in years past are normalising. See also the significantly lower payout from Rio Tinto ((RIO)) last week.

Bank dividends remain poised for strong increases this year, but then expected to largely remain unchanged in FY24.

On Citi's projections, total dividends paid out to Australian shareholders are likely to contract by some -6% in FY23, and again by a similar percentage in FY24.

Dividends from the resources sector are projected to shrink by -25% and -22.6% respectively for both years, with dividends expected to fall more than earnings due to lower payout ratios.

Optimism Trumps Fear

Back in February, corporate results in Australia proved a reality check for a market that had put in a fierce rally off the September-October lows, but five months later the broader dynamic is changing.

The Q2 reporting season in the US has been strengthening the overall impression that things are starting to improve and that before long companies and investors can start looking forward to growth in profits and sales again.

It is for this reason market strategists at Citi have turned more positive on the outlook for the S&P500 in the year ahead. Citi last week upwardly revised its targets for this leading index to 4600 by year-end and to 5000 for mid-next year.

The implication, explain Scott Chronert & co, is that any pullbacks can now be bought for an earnings growth acceleration call in 2024.

The team of strategists at Macquarie (bearish on Australia) broadly concurs, suggesting profit margins in the US are holding up better-than-expected, while inventories no longer seem the problem they once were.

All in all, earnings forecasts are no longer downgraded in the same fashion as they have been in recent quarterly reporting seasons in the US and this is feeding into generally broadening market optimism.

Divergence Dominates ASX Prospects

In Australia, the outlook appears a lot more challenging, as also indicated by analysts at Wilsons whose research update laid bare the extreme divergence in growth prospects for Australia's largest companies.

Zooming in on the local Top20 for the three financial years of FY23-24-25 immediately highlights the meagre, if not negative forecast trajectories for ASX-heavyweights including BHP Group ((BHP)), Fortescue Metals ((FMG)), Rio Tinto, Santos ((STO)), Woodside Petroleum ((WPL)) and all four of the major banks.

It goes without saying, share prices in commodity companies remain leveraged to any changes impacting on sector dynamics. Share prices have surged recently on speculation of more stimulus from the Chinese government to pull that economy out of its moribund state.

Wilsons' research also revealed which large cap companies in Australia look set to rise above the cornfield when all others will be struggling to keep the EPS growth pace positive:

-Aristocrat Leisure ((ALL))
-CSL ((CSL))
-Goodman Group ((GMG))
-Newcrest Mining ((NCM))
-Telstra ((TLS))
-Woolworths ((WOW))

Wilsons retains a mildly positive outlook for the Australian share market, also noting the median EPS growth forecast for the ASX100 ex-resources and banks is 10% for the year ahead, following on from a predicted 5% growth pace in FY23.

As said: the broad, generalised numbers for the ASX only tell half of the story, if that.

A recent survey among sector analysts at Morgan Stanley signals cost pressures are seen worsening for 35% of reporting companies in August, with pressures improving for circa 8% of companies.

Most analysts expect market forecasts to fall further as the August season unfolds.

Forecasting Beats & Misses: Goldman Sachs

Ahead of every reporting season, analysts and strategists put in their best effort to identify which companies most likely might surprise in a positive manner, and which companies seem poised for that nasty, negative disappointment.

Such forecasts are not always 100% accurate as companies sometimes still have offsetting levers at their disposal, while other times share prices have already been marked down allowing upside to be triggered by even the slightest hint of optimism.

Equally important: a falling share price need not always be negative news as it allows investors to get on board of companies they might have previously deemed too expensively priced. Existing shareholders can buy more exposure at a lower price.

Small cap analysts at Goldman Sachs have their eyes set on margins and balance sheets, suspecting earnings risks stem from higher inflation, wages in particular, and from higher interest rates.

It is this focus that keeps the team cautious on small cap companies such as Dicker Data ((DDR)), Maas Group Holdings ((MGH)), Inghams Group ((ING)) and Ingenia Communities Group ((INA)).

For potential positive surprises, the team is looking at Data#3 ((DTL)), Life360 ((360)) and Fineos Corp ((FCL)).

Goldman Sachs' small cap favourites leading into August are (ranked in order of preference):

-Macquarie Technology Group ((MAQ))
-Lifestyle Communities ((LIC))


Those aforementioned (bearish) strategists at Macquarie favour ResMed ((RMD)) over Credit Corp ((CCP)) this week, and Boral ((BLD)) and Computershare ((CPU)) next week over CommBank ((CBA)) and Charter Hall Long WALE REIT ((CLW)).

Macquarie also makes it a habit to highlight where its own projections are opposite market consensus, thus suspecting potential for upgrades following market updates from Allkem ((AKE)), Lynas Rare Earths ((LYC)) and IGO Ltd ((IGO)).

On the same basis, downgrade risks are seen for Northern Star Resources ((NST)), Woodside Energy, Santos, IDP Education ((IEL)), Reece ((REH)), and Mirvac Group ((MGR)).

As reported in prior editions, Macquarie sees plenty of reasons to stay cautious towards the Australian share market and reminds investors August and September can be quite volatile.


Quant analysts at Citi have nominated the following companies for a positive surprise in August, with High Conviction:

-Abacus Property Group ((ABP))
-Autosports Group ((ASG))
-Carsales ((CAR))
-Domain Holdings Australia ((DGH))

In contrast, the following have been marked as High Conviction Sell-rated disappointers:

-Alumina Ltd ((AWC))
-BWP Trust ((BWP))
-Liontown Resources ((LTR))

In what can be interpreted as a positive signal, Citi's sector analysts are expecting a relatively balanced outcome between positive and negative surprises this season, though this in itself marks a negative trend given the balance favoured the positive ahead of the February season.

Citi sees higher costs as the key factor dominating results and forecasts this month, though investors will also be curious whether macro conditions are impacting on a company's top line, suggests the quant team.

One of the sectors that is expected to continue suffering from inflation pressures (higher costs) is healthcare with companies that are not enjoying strong top line growth likely to continue exhibiting margin pressure. Citi is keeping a close watch on the likes of Australian Clinical Labs ((ACL)), Healius ((HLS)), Integral Diagnostics ((IDX)), and Ramsay Health Care ((RHC)).

Also: Citi expects the relative underperformance of the Australian market to continue, sticking with a mid-2024 target for the ASX200 of no more than 7400. This is despite the US market looking more "expensive" and the Australian market merely trading around its 15-year median PE ratio of circa 15x.

Other companies poised for outperformance, on Citi's quant research, include Altium ((ALU)), REA Group ((REA)) and Zip Co ((ZIP)) while alarm bells are reported ringing for the likes of Lendlease ((LLC)), Lynas Rare Earths, and Region Group ((RGN)).


The most intensive research exercise ahead of August appears to come from the team of small cap analysts at UBS. Here we focus only on the most important calls made.

UBS expects to see a double negative, in the form of a disappointing earnings miss and a disappointing outlook, from the following small and midcap companies:

-Adore Beauty Group ((ABY))
-AMA Group ((AMA))
-Dicker Data
-IPH Ltd
-MA Financial Group ((MAF))
-Servcorp ((SRV))

A double positive is anticipated from:

-Audinate Group ((AD8))
-Autosports Group
-Corporate Travel Management
-Hansen Technologies ((HSN))
-Infomedia ((IFM))
-Ridley Corp ((RIC))
-SiteMinder ((SDR))
-Temple & Webster ((TPW))

Ignoring all of the above, UBS's favourites for the year ahead are:

-Autosports Group
-Breville Group
-Corporate Travel Management
-GUD Holdings
-Hansen Technologies
-NRW Holdings ((NWH))
-Ridley Corp
-Webjet ((WEB))


One sector for which a much stronger FY24 could be in waiting are engineers and contractors, while operational momentum for general insurers remains strong, which should equally rub off positively for the insurance brokers.


FNArena will start updating its Corporate Results Monitor this week:

For more reading on the upcoming August results season:

Conviction Calls and Best Ideas

As has become a local tradition in years gone past, Morgan Stanley has once again communicated its small cap results convictions and this time around, ahead of the August season, the nominees are:

-Audinate Group
-Breville Group
-Corporate Travel
-IPH Ltd
-McMillan Shakespeare ((MMS))

All have been nominated from a positive angle.


Citi's healthcare favourites are CSL, ResMed, and Sonic Healthcare ((SHL)).


Wilsons yet again expressed its preference for resilient businesses that can show off their earnings resilience and a recent update highlighted the following candidates:

-APA Group ((APA))
-HealthCo Healthcare and Wellness REIT ((HCW))
-The Lottery Corp ((TLC))
-NextDC ((NXT))


Following share price weakness, Goldman Sachs has added Endeavour Holdings ((EDV)) to its selected list of Conviction Buys in Austalia and New Zealand.

August Results: Early Observations

Overall, confession season in Australia has made a come-back, but it's been a rather mildly negative experience with a rare profit warning from quality large cap CSL ((CSL)) probably the stand-out. Earnings estimates have been sliding downwards generally, but mostly due to disappointments and deteriorating outlooks for mining companies.

Early indications are nevertheless that investors will have to be prepared for more negative consequences from higher interest rates and a more challenging operating environment.

Examples include credit provider Solvar ((SVR)) reporting an 81% increase in interest costs, engineering firm Downer EDI ((DOW)) announcing a -$550m impairment and CommBank ((CBA)) flagging a -$212m pre-tax provision in relationship to the BankWest transition.

Landlord BWP Trust ((BWP)) lost some -$131m through the devaluation of its properties, while credit collector Credit Corp ((CCP)) observed an increase in US payment plan delinquencies.

As to why exactly shares in ResMed ((RMD)) needed to be sold down in excess of -14% in the two days since releasing Q4 financials is not at all clear to me, for a quarterly outcome that merely missed by -5% on what might well turn out a temporary setback for the gross margin.

If I had to take a stab in the dark, I suspect quite a number of market participants had positioned themselves for a positive surprise, as overall optimism among analysts had only grown in the months past, but disappointment ensued and thus those trades have been quickly unwound, at a loss.

Similar to CSL previously, the FNArena/Vested Equities All-Weather Model Portfolio has grabbed the opportunity to purchase additional shares in ResMed.

For Australian banks in general no meaningful credit concerns are expected to show up in August, or later on in 2023.

In-house predictions made at Ord Minnett see 47% of company reports in August reflecting a positive outlook, with negative outlooks expected for 17% of companies and the remaining 36% on neutral.

All shall be revealed from this week onwards, but more realistically throughout the final two weeks of the month.

Conviction Calls and Best Ideas

Quant analysts at UBS have access to proprietary data on market positioning by hedge funds and institutional investors in Australia. This, so the narrative goes, allows them to assess when trades become overcrowded.

Applying their insights, and experience, with regards to the upcoming August results season, has delivered the following:

Most long crowded long side list:

-Helia Group
-McMillan Shakespeare ((MMS))
-APA Group ((APA))
-QBE Insurance ((QBE))
-CSR ((CSR))

Most short crowded short side stock list:

-Core Lithium ((CXO))
-ARB Corp ((ARB))
-Sayona Mining ((SYA))
-Wesfarmers ((WES))
-Ingenia Communities Group ((INA))

The general idea is that the first group might fail to perform positively, since those ideas might now be too overcrowded already, while the second group could see shorters scrambling to save their bacon, pushing the share price up significantly in the process.


Morgan Stanley also has a quant team, and their special tool is called "composite earnings sentiment indicator", shortcut CeSI. Screening for positive and negative surprises ahead of results releases has generated a hit rate of no less than 87%, reports the team.

And thus…

Seemingly poised for positive surprise this month, and not rated badly by the fundamental analysts, are: Goodman Group ((GMG)), Iluka Resources ((ILU)), James Hardie ((JHX)), nib Holdings ((NHF)), Origin Energy ((ORG)), Sonic Healthcare ((SHL)), Santos ((STO)), Suncorp Group ((SUN)), and The Lottery Corp ((TLC)).

At danger for releasing the next disappointment are: Ansell ((ANN)), ASX ((ASX)), Bank of Queensland ((BOQ)), Cochlear ((COH)), Endeavour Group ((EDV)), Fortescue Metals ((FMG)), Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), Mineral Resources ((MIN)), and Ramsay Health Care.


Some portfolio management of the Focus Portfolio at Wilsons has seen exposures trimmed to Pinnacle Investment Management ((PNI)) and Cleanaway Waste Management ((CWY)) in order to purchase additional shares in ANZ Bank ((ANZ)) and Westpac ((WBC)).

The Portfolio remains Underweight the local banking sector as Wilsons continues to see margin pressures ahead. Pinnacle Investment Management has been removed from the Portfolio. A decent exposure to the China stimulus theme is kept through mining companies.

With an emphasis on earnings resilience and corporate quality, the Portfolio's holdings include APA Group, Aristocrat Leisure ((ALL)), CSL, Goodman Group, The Lottery Corp, Macquarie Group ((MQG)), Netwealth Group ((NWL)), NextDC ((NXT)), ResMed, Telstra ((TLS)), and Xero.


Morgan Stanley's Australia Macro+ Focus List last experienced any changes to its composition in late January.

The ten stocks included are:

-Aristocrat Leisure
-Goodman Group
-IDP Education ((IEL))
-Macquarie Group
-Northern Star Resources ((NST))
-Rio Tinto ((RIO))
-Suncorp Group
-Treasury Wine Estates ((TWE))

Noted: after Citi put the Australian share market in the Underweight basket recently, global asset allocators at Morgan Stanley have followed their example and downgraded Australia to Underweight last week.

As the analysts explain, Australia is now ranked 22nd of 27 global markets as earnings remain in a downgrade cycle and with valuations generally seen as "expensive".

A further deterrent is the prospect of downward pressure on bulk commodity prices as Morgan Stanley sees oversupply looming in the current half.


Quants at Macquarie note a basket of stocks with high short interest can outperform during results season as stocks with the highest short interest usually prove a good contrarian indicator.

As such, the broker mentions Pilbara Minerals ((PLS)), Mineral Resources and Endeavour Group inside the ASX50, IDP Education, Harvey Norman and Domino's Pizza ((DMP)) inside the MidCap50, and Boral ((BLD)), Core Lithium ((CXO)) and Maas Group Holdings ((MGH)) among small caps.


Analysts at Goldman Sachs have selected the following names for a potential positive surprise this season:

-Capitol Health ((CAJ))
-Data#3 ((DTL))
-Endeavour Group
-Judo Capital Holdings ((JDO))
-Qantas Airways ((QAN))
-QBE Insurance
-Woolworths ((WOW))

Have been nominated for potential disappointment:

-Altium ((ALU))
-Challenger ((CGF))
-Maas Group
-Monadelphous ((MND))
-Nanosonics ((NAN))
-Pilbara Minerals
-Seek ((SEK))


Specifically for Australian financials ex-banks, UBS' sector analysts are anticipating positive news from private health insurers, from insurance brokers, as well as from Computershare ((CPU)), Suncorp Group, Hub24 ((HUB)), GQG Partners ((GQG)) and Magellan Financial ((MFG)).

The analysts are bracing for potential disappointment from AMP ((AMP)), ASX, Insurance Australia Group ((IAG)), Challenger, Perpetual ((PPT)) and Platinum Asset Management ((PTM)).


Fund manager DNR Capital has turned more positive on small cap opportunities now that earnings expectations are being wound back and many a share price is left looking attractive with a medium to longer term view.

Investors still need to remain selective and conscious of ongoing risks, according to DNR Capital with the fund manager recently adding Lovisa Holdings ((LOV)) and Breville Group ((BRG)) to its portfolio.

The fund is reducing exposure to the local mining sector.


Morningstar's list of Best Ideas for ASX-listed companies has undergone three changes from last month, when the list was updated last. Out went WiseTech Global and AGL Energy ((AGL)) while the ASX has been added post a net negative share price performance year-to-date.

Morningstar's Best Ideas for Australia and New Zealand now comprise of 13 companies, with the following retaining their inclusion:

-A2 Milk Co ((A2M))
-Aurizon Holdings ((AZJ))
-Bapcor ((BAP))
-Fineos Corp ((FCL)) ((KGN))
-Lendlease ((LLC))
-Newcrest Mining ((NCM))
-TPG Telecom ((TPG))
-Ventia Services Group ((VNT))


Technology analysts at Citi have nominated their three favourites for the sector locally: Carsales ((CAR)), NextDC and Xero.

Rudi Interviewed: Have Cash, Can Be Patient

It has become the 'unofficial' tradition in recent years: an interview with Livewire Markets ahead of yet another corporate reporting season in Australia. Below is a sub-edited transcript from last week's interview, released this week by Livewire (also available on YouTube).


Interviewer: Hello, and welcome to Livewire markets. I'm Allie Selby, and over the last few weeks markets have continued to do what they do best; climbing a wall of worry, despite calls of calamity that is to come. But if there's one man who will definitely say how it is, it is FNArena's Rudi Filapek-Vandyck, thank you so much for joining us today for this reporting season premiere.

Rudi: My pleasure. Let's keep the tradition ongoing.

Interviewer: Rudi, What do you think investors can expect?

Rudi: I think it will be more polarised than usual and I think it will be a case of paying attention to detail. The dynamics in the US are now different from Australia. In the US, there is a growing perception, correct or incorrect, that earnings might be bottoming. In Australia, we're still staring towards further falls, although those are general averages.

If we look into the details, we see that those responsible for those falls locally are predominantly miners, energy companies and the banks. Take them out, plus retail and the REITs as well, and it appears there are segments in the market that are actually looking forward to an acceleration in growth.

These will be the two poles in this market that we are about to witness in August. And beyond, as I very much doubt all questions will be answered this August.

Interviewer: Are there any early themes that have emerged during the confession season?

Rudi: To my surprise, confession season has been quite mild, even though it has returned; we hadn't seen it for a while. Still, confession season has been rather mild and this might put pressure on the outlooks provided in August.

The one thing that should catch investors' attention from overseas experiences is it would appear companies whose share price has performed well this year, even if they beat expectations, that share price might still tank. And vice versa; companies whose share price has lagged this year, in some cases they even miss forecasts, but the share price still goes up.

So we might have opposite dynamics this season. We've seen a few examples locally, but we will have to wait and see. It's still two weeks before we really are into the thick of it, locally. But if that's the new trade, investors might have to adjust their strategies.

Interviewer: That's definitely interesting. I feel like we've seen a lot of market commentators say that expectations are still too high. Do you agree?

Rudi: They are falling, and they are falling quite rapidly in Australia. But again, I think we should look at the details. Analysts tend to be behind the curve, usually they are, so we'll see lots of adjustments and it will be a case of segment by segment, company by company. Many companies will see their forecasts drop. In general, expectations are that, on average, forecasts will drop.

For Australia, the average forecast is for negative growth next year. Dividends in aggregate will shrink this year and the expectation is this is only step one; dividends will drop further next year. Again, if we look into the details, forecasts for bank dividends this year are still okay; actually they look quite good.

It's the miners and the energy companies, the cyclicals that are reducing their dividends. We have already seen BHP Group ((BHP)) and Rio Tinto ((RIO)) doing exactly that. Those are the prospects we are looking forward to in Australia.

Interviewer: So are you avoiding those companies in this reporting season?

Rudi: Well, I'm not a big investor in cyclicals in the first place. But I do think the major mistake investors can make here is to look backwards in terms of dividends, because in particular those sectors will be cutting the dividend.

Interviewer: Are there any stocks that you're watching in particular that you think will have, maybe, a really juicy reporting season?

Rudi: More than just a few. The top of the market is obviously very much dependent on banks and resources, but if you peel away the Top100, or let's say the Top20, there are companies that stand out and will do well, even though the outlook is quite benign for the Australian economy.

Unfortunately, those companies are not necessarily on everyone's radar because these companies do not necessarily trade on a single digit PE. You can easily mention Aristocrat Leisure ((ALL)), which does not report in August. But it includes CSL ((CSL)) as well, and Goodman Group ((GMG)), and Woolworths ((WOW)).

Interviewer: Any small caps?

I noticed expectations are growing ahead of earnings results for Audinate Group ((AD8)), SiteMinder ((SDR)), Fineos Corp ((FCL)), and Data#3 ((DTL)); these are often mentioned. There are also the contractors and engineers. There's definitely a trend ahead of August where analysts are increasing their forecasts for this sector.

One sector I'd like to highlight is the healthcare sector; in the past two decades at arm's length the best performing in Australia, and it really is at arm's length. Since covid, that sector has been lagging. Think Fisher & Paykel Healthcare ((FPH)), ResMed ((RMD)), Ramsay Health Care ((RHC)), CSL, Sonic Healthcare ((SHL)) – all are lagging the market.

The interesting thing is analysts covering this sector are pretty much waiting for the pivot point when that sector becomes attractive again. Maybe August could provide that pivot point. Otherwise, it might be February next year.

Interviewer: Let's talk about that. I feel like all the signals are pointing in different directions at the moment, for the market in general. What signals are you watching to know when to pivot?

Rudi: The difficult circumstances that lay ahead of us, they do not impact the market as a whole. There's always the difference that when, for example, Fortescue Metals ((FMG)) has a tough time ahead of itself, then maybe for a ResMed or a CSL their time has arrived.

That's the polarisation we have in this market. For some of the laggards, maybe their time will come when it's still too early for the retailers and the REITs, and for some of the cyclicals.

I think that's more important than seeing the market in general. If the share market outlook looks quite benign from here, that's predominantly because BHP and other iron ore producers, and the banks, represent such a big chunk of it.

If you cast your net wider, expectations are very strong for insurers this reporting season. That's not simply QBE Insurance ((QBE)) and Insurance Australia Group ((IAG)) only, but also the private health insurers and, in addition, the brokers, Steadfast Group ((SDF)) and AUB Group ((AUB)).

A company that is not often mentioned in this context, is Fineos Corp; it operates in the slipstream of these very strong dynamics for insurance companies, which is now translating in better dynamics operationally.

Interviewer: On the other side of the ledger are interest rate beneficiaries; we've seen a lot of tech companies rally strongly this year. Do you see that continuing?

Rudi: It's all in the hands of the bond market, really. That sector has really seen a revival simply because the bond market provided relief, and the share market just went along with it.

The other element is resilience in the face of tough economic conditions. I couldn't help but noticing for REA Group ((REA)), and for WiseTech Global ((WTC)), and for Carsales ((CAR)), plus a number of others… forecasts, valuations and price targets are going up. Those stocks have already performed really, really well.

I think the message here for investors is: it's not just a low PE that gives you value in this market. It can be on higher PEs.

Another thing that will likely come to the fore this August as well is artificial intelligence, AI. It's the one big theme that has driven the tech sector globally. When we're getting excited locally it's all about NextDC ((NXT)) and Macquarie Telecom, now Macquarie Technology Group ((MAQ))…

Interviewer: …and Megaport ((MP1))…

Rudi: … Yes, and maybe a little bit of Appen ((APX)). I am wondering whether, maybe, Dicker Data ((DDR)) could also be a beneficiary. Maybe Telstra ((TLS)) is a beneficiary. Hopefully we'll find out in August.

Interviewer: Are there any sectors where sentiment is so poor that you feel like most of the bad news is already priced in?

Rudi: That's a difficult one. Two sectors that could be on investors' lists are the retailers and the real estate investment trusts (REITs). I still think in both cases there's more bad news to come. I think if you're moving in those sectors you are early.

Again, that's a general view. There are always exceptions. I mentioned Goodman Group earlier. That's also officially a REIT, but it is performing well; not the same as the majority of the sector.

I think the best strategy now is to take a long term view, at least three to five years, and take potentially more bad news on the chin. On the expectation, of course, as long as you don't pick the ultimate bad apples, that those share prices will come good in three to five years' time.

Those two sectors, all else being equal, also pay good dividends so you actually get paid to wait it out for a while. Needless to say, I think investors should still take on board there is potentially more bad news coming for retailers and for REITs.

Interviewer: Where else are you seeing bad news at the moment? Which areas of the market should investors be steering clear off right now?

Rudi: I am not certain about this whole China stimulus revival. I see a struggling Chinese economy instead. That sector also tends to struggle with higher costs. We just had a season of quarterly production updates and many miners surprised to the downside because they cannot control their costs. I think that's again going to show up in August, and beyond.

Interviewer: Last time you spoke with Livewire was in February and you told us that you're holding 18% cash. That's a lot of cash. Are you still holding 18% cash? How's that cash holding going to change?

Rudi: If you think that's a lot, at one stage last year, in 2022, I had more than 40% in cash. I think I need to create a bit of context.

One of the promises we made when we started managing the portfolio is that we would protect investors' capital to the downside. In very simplistic terms: if your capital goes down by -40% and it then goes up by 50% or 60% the following year, you're still down overall.

If the portfolio only goes down by -3, 4, 5, 6 or -7%, you don't need much to get back in the black. That's one of the reasons why we sometimes move into cash.

Another reason is I am interested in quality companies. When bond yields cause mayhem, their share prices go down. Sometimes by a lot.

To answer your question: the portfolio still has 18% in cash. We're very patient as to how to allocate it. I think the risks have now moved from the macro level to the micro. So now it's about companies underperforming or performing in August. I suspect we'll get a lot of volatility this month, and after August follows September, so I think we can be patient.

That money is looking to be allocated gradually, not in a hurry. For example, I have been a long term fan of CSL. When you see the share price selling off, that's where part of the cash goes to. I am watching many more companies. If their share prices go down, it's time to top up.

Interviewer: Apart from volatility, what are you looking out for to actually put that 18% cash to work?

Rudi: Some companies I would like to own but I no longer do because I have been surprised by how their share prices have performed. Like, for example, Pro Medicus ((PME)) and WiseTech Global. With 18% in cash I'm thinking: please sell those shares, halve the share price, and I'll be buying!

Interviewer: Thank you so much for your time. I really enjoyed that chat.

August Results: Early Observations

From a general market sentiment perspective, the importance of the financial performance of CommBank ((CBA)) in Australia is pretty much self-explanatory. Not only is CBA the largest (premium) bank in the country, it is also the second largest constituent of the ASX200.

Last week, CommBank's FY23 financials proved slightly more resilient than most analysts had been expecting. Management and the board at the bank showcased their operational confidence by lifting the dividend for shareholders by 14% plus announcing a $1bn share buyback on top.

In sticking with the local tradition from the past two decades or so, when things get hairy for local banks and the economy, CommBank stands ready to show the world who's boss. Plus there's always the knee-jerk response to make sure loyal shareholders are pampered. CommBank's blueprint was also followed by minnow Bendigo and Adelaide Bank ((BEN)) on Monday (dividend up by 15%).

While questions remain about what exactly to expect from the year ahead given rate hikes impact at a significant delay and all that, CommBank's FY23 performance has injected enough confidence for most sector analysts to now project ongoing dividend increases for the years ahead.

This is a notable improvement from the weeks and months preceding this year's August results season when just about every analyst had penciled in one more rise for the dividend, followed by one year, maybe two years, of no further increases.

While the overall mood change post FY23 release is undoubtedly a positive, investors should equally keep things in perspective. Consensus forecasts now see CBA's dividend growing by 1.7% this year, and by 2.6% next – a far cry from the double digit pace that has characterised the years gone by.

Herein lays the challenge for investors this season: how good exactly is good news? CommBank's profits are still expected to remain under pressure, as they have been in the six months past.

The bank cautiously added to its provisions to cover bad and doubtful mortgages on the rise. Things are still expected to deteriorate first, before they can get better.


As we enter week three of the August season, Australian investors really only had a tiny taste of what is yet to come in the second half of this month. On Monday, the FNArena Corporate Results Monitor still only consists of 34 assessments when circa 350 are expected by early September.

The early signals are, yet again, remarkably positive with companies' sales proving relatively resilient amidst plenty of data and anecdotes suggesting households are increasingly financially challenged.

Comments by CommBank and some of the retailers (Myer, Nick Scali) suggest the true impact is only now starting to be felt, which potentially shifts true risks for disappointment to February next year, or even to next year's August depending on how slowly this process unfolds.

For the optimists among us, such an elongated trajectory equally opens up the possibility that rate hikes and inflation won't impact as much as we fear in 2023.

I'd be surprised, however, if the market overall doesn't adopt a safety-first approach in the short term given there's now a downward trend and nobody knows how long or how far it will stretch to the downside.

Note how CommBank shares have been unable to hold on to their gain post result release, though they are still trading above $100 and well-above consensus target (as is their habit).


Not wanting to diminish ComBank's performance, or its importance, but the two outstanding, forecasts-beating performances thus far have been delivered by James Hardie ((JHX)) and Boral ((BLD)).

Both market updates have raised confidence and forecasts, as also illustrated by a visible up-tick in consensus price targets for both since releasing financial results.

Both companies are cyclicals, leveraged to construction cycles locally and overseas, and both have had a challenging time in years past leading to multiple profit warnings and disappointments.

Confidence seems stronger for James Hardie which offers more exposure to North America, but strong gains on the day of reporting have since been replaced with gradual, persistent share price erosion.

In their slipstream, it's worth pointing out positive surprises to date have also been delivered by AMP Ltd ((AMP)), Cettire ((CTT)), and News Corp ((NWS)); all are share market laggards for whom expectations might have finally fallen deeply enough so that the path of least resistance leads such companies to finally beat forecasts.

That initial observation, however, needs to be complemented with the fact many of market laggards are still finding it rather tough to decisively reverse the momentum, as also proven on Monday with not so great financial updates released by Ansell ((ANN)), Aurizon Holdings ((AZJ)), Beach Energy ((BPT)), and Lendlease ((LLC)).

One early observation is cost inflation and margin disappointment are shaping up to become key features this August. This makes it extra-extra difficult to predict winners and losers beforehand.

And while aggregate dividends are forecast to fall, predominantly because the price of iron ore is no longer at dizzying highs, shareholders have already seen unexpected dividend disappointment from Coronado Global Resources ((CRN)), QBE Insurance ((QBE)) and Suncorp Group ((SUN)). Rio Tinto's ((RIO)) dividend was expected to fall sharply, but still missed forecasts.

On the opposing side, AGL Energy ((AGL)) surprised positively, as did AMP (assuming anyone still cares about the latter).


The number of companies reporting to date might be only a fraction of what is yet to come this month, ten of those already reporting are REITs or property developers. As expected, the warning signs are there: higher costs, margin pressure, and above all: higher costs to service debt.

The most precarious thus far seems Charter Hall long WALE REIT ((CLW)). A disappointing outlook, also weighed down by a higher interest burden, in combination with too much leverage on the balance sheet is now putting this REIT at risk of falling faul of its debt covenants next year.

Management at the REIT remains confident some assets can be sold, to alleviate the threat. Shareholders will be keeping their fingers crossed that confidence won't prove misguided.

As many experts have come to the view that global bond yields should have seen their peak for this cycle, it makes a lot of sense to carry at least some exposure to ASX-listed REITs, in particular since the sector generally is trading at sizeable discounts to asset valuations, up to -30% and more in some cases, while implied dividend yields can be as high as 7% and higher.

The problem remains these intrinsic discounts are the result of widespread uncertainty whether bond yields have indeed peaked and how much of asset re-pricing -devaluations!- needs to take place in the year(s) ahead. Meanwhile, darker scenarios for household spending would spell additional set-backs for many a REIT in Australia, including the potential for much sharper asset devaluations.

As per usual, there's no such thing as a risk-free lunch in financial markets and the more adventurous yield and value-seekers might have to be patient for (a lot) longer.

The former heavyweight in the local sector, Unibail-Rodamco-Westfield ((URW)) is now trading at a discount that boggles the mind; the gap between the share price and the valuation put forward by Morningstar/Ord Minnett is no less than -85%. If next year sees the return of dividends to the extent the analyst is forecasting, the yield at today's share price is in excess of 16%.

How much of today's discount is purely related to market sentiment? It's the crucial question for the owner of shopping malls worldwide that require lots of investments to remain competitive. Meanwhile, the balance sheet is burdened with a mountain of debt. Here too asset sales are part of management's strategy towards reprieve.

The FNArena/Vested Equities All-Weather Model Portfolio has exposure to the local REITs sector through Goodman Group ((GMG)), as the primus inter pares locally, and HomeCo Daily Needs REIT ((HDN)), which should prove resilient, while trading at a sizeable discount and offering dividend yield in excess of 7%.


One observation that usually applies each results season is the truly strong business franchises show their inner-strength, proving the doubters and the critics wrong by simply posting yet another strong set of financial metrics.

On Friday, REA Group ((REA)) did exactly that and on Monday Carsales ((CAR)) followed suit. Many an analyst expects Seek ((SEK)) to complete this triangle of strong results from online media platforms when it reports tomorrow (Tuesday).

Tomorrow's scheduling also includes CSL ((CSL)) and Pro Medicus ((PME)), so there's plenty to look forward to for investors who like to own the strong and the resilient. Apart from the usual debate about valuations, pretty much recurring every results season and in between, this year's general context is slightly different.

This time around Australia's number three index weight, CSL, has issued a profit warning beforehand to rein in analysts' expectations regarding its post-covid margin recovery, while also warning of negative FX impacts. With the share price not performing post covid, CSL has lost its halo, at least for the time being, and investors will be looking for clues as to where exactly those quality growth propects are hiding.

Things have become a lot worse very quickly for the number two in the local healthcare sector, medical device manufacturer ResMed ((RMD)). Having missed market forecasts by some -5% due to a lower gross margin in the June quarter, the market saw more reasons to sell after US pharmaceutical Eli Lilly announced a clinical trial to prove its treatment for obesity and diabetes can become an alternative for CPAP devices for people diagnosed with sleep apnea.

Given the enormous success of anti-obesity and diabetes treatments from Eli Lilly and Novo Nordisk, this surely means there's no viable business left for ResMed?

In simplistic format, that's one conclusion to draw from the rather savage sell-off in ResMed shares since August the 4th, but the situation on the ground doesn't seem that simple or straightforward.

A recent deep dive into this matter by healthcare analysts at UBS highlights that obese people with diabetes, the main territory for which the related treatments are being developed, only represent a small portion of your typical CPAP user. Certainly, both pharma companies will try to sell as many of their drugs to non-diabetics who simply want to lose weight, but this does not automatically impact on ResMed's audience or potential.

One of the key differences is governments the world around are prepared to subsidise an effective treatment for obese people with diabetes, but not for overweight people who simply want to lose weight. With costs running as high as US$1000 per month, and not lower than US$500/month in case insurers or employers jump in, the costs for today's popular lose weight remedies remain too high for most.

One outcome is most users stop using once they've achieved their targeted weight. Guess what happens next? The weight comes back on. There are also lots of side-effects, some very nasty, plus there is a percentage of the population for which these treatments remain without impact, i.e. they simply don't work for everyone.

Having done some research myself, I discovered stories about GPs in Europe who ban some of their patients from using these popular lose-weight treatments, because the side-effects are causing too much harm to their bodies. The most often mentioned longer-term effects are weakening bones and muscles disappearing, together with nausea, vomiting and diarrhoea in the here and now.

I see a similarity with increased competition for CSL's specialty products division from ArgenX's break-through treatment targeting people with severe autoimmune disease. Yes, it's an important development that should not completely be ignored, but at the same time all speculation about the death of CSL's growth path remain well outside the ballpark of plausible scenarios for the decade ahead.

Here's the response from Portfolio strategists at Wilsons this week:

"After downgrades for CSL and RMD, we believe now is an opportune time to buy two high quality stocks at very reasonable valuations.

"ResMed (RMD) – This is a rare opportunity to buy a world leading medical device company with a strong earnings outlook at a ‘cheap’ price, with RMD now trading at an FY24 PE of ~25x.

"CSL (CSL) – High-quality and defensive earnings with a growth recovery story (earnings CAGR of 20%). At an FY24 PE of 28x, a good buying opportunity for a quality long term compounder."

Other companies that have my personal interest this week include Amcor ((AMC)), Cochlear ((COH)), Goodman Group, HomeCo Daily Needs REIT, Netwealth Group ((NWL)), Orora ((ORA)), Steadfast Group ((SDF)), Telstra ((TLS)), and Transurban ((TCL)).

Bring it on!

August Signals: Resilience Shines, Forecasts Slide

August is well passed the half-way mark, but in Australia the all-important week four in the local results season has only just started.

In terms of numbers of corporate results updates, this week's running will more than double the total thus far. In terms of index weight, around 50% in market capitalisation has now reported with this week scheduled to add an additional 45% in index weight terms.

If Monday can be taken as our guide for the remainder ahead, share price volatility is about to regain prominence with shares in Iress ((IRE)) down -34.9%, losses on the day for Adairs ((ADH)) are -14%-plus and a2 Milk's ((A2M)) forward-looking guidance has caused its shares to retreat by -13.5%.

On the positive side, investors are discovering strong results from Audinate Group ((AD8)) are good for a 17% gain initially, later on pared back to 10.68%, while Premier Investment ((PMV)) shares are up 12.2% and Charter Hall's ((CHC)) confidence and relative resilience are good for a gain of 3.5%.

Breville Group's ((BRG)) result was equally well-received, while the opposite proved true for updates by Elders ((ELD)) and Reliance Worldwide ((RWC)).

All the while, that big rally off the low in June has virtually disappeared, similar to what had happened back in February. Year-to-date the ASX200 ex-dividends is only up circa 1% from the 1st of January, thanks to this month's pullback to date of nearly -4%.

Corporate results are important, but they are not the only share market driver around. As was the case back in February, macro-economic influences are just as important.

Probably the most important observation is that bond yields, globally, are rising yet again, with plenty of narratives swirling around to keep investors guessing about the true meaning and implications of it all.

Are we preparing for higher-for-longer inflation? Pricing out near-term rate cuts? A consequence of the Japanese bond market reset? Global liquidity withdrawing? Or is this the end of future recession expectations and a warning signal for an imminent share market sell-off?

The number of warning signals generated by troubling signals and trend reversals on technical charts seem to be multiplying rapidly this month, which no doubt is having an impact on general sentiment too.

The one pivotal event that only just happened is the yield on offer from the Australian government's 10-year benchmark bond is now higher than the average yield for the ASX200; 4.30% versus 4.20%. This phenomenon has not been witnessed locally since 2009-2011, more than one full decade ago.

To be fair, the Australian bond market offering higher yields than what is available through the share market was pretty much the standard setting in Australia pre-GFC, but the general context is different today, and it certainly has been different over the past 15 years.

Equally noteworthy is the Australian dollar which has sunk to US64c, and lower, these past few weeks – a far cry from attempting to crack through the US70c level and now a potential source for additional inflation headache. The five-year average sits at US70c so this latest move definitely bears watching.

On Morgan Stanley's assessment, an average -10% decline in the trade-weighted AUD usually translates into 1ppt higher inflation over the following one to two years in Australia. On a trade-weighted basis, the AUD has now broken below 60 and is trading near post-covid lows.

China's Pain

Of influence in this process, no doubt, is investors reversing their optimism on all things related to China.

Earlier in the year, the sluggish recovery in the Chinese economy was feeding into market optimism that more stimulus was forthcoming, hence buy more exposure!

Recently, that sentiment has been replaced with a general realisation that all is not well in the Middle Kingdom. More stimulus is not the simple panacea for all ills weighing down on the Chinese economy.

In August, we are collectively worrying about how bad things actually are in the world's second largest economy, and whether they might get a lot worse still.

Share prices of iron ore producers on the ASX are in retreat, but they are still showing relative resilience in line with the price of their key product in China thus far.

But Monday's update by infant formula marketer a2 Milk ((A2M)) shows China has become one tough challenge for ASX-listed exporters.

Guidance provided for the year ahead by company management together with the FY23 result release implies consensus forecasts might have to reset lower by -10%, which is weighing down on the share price post market update.

Results Thus far: FY23 Resilience meets FY24 Challenges

On Monday, the FNArena Corporate Results Monitor comprises of 107 market updates, of which 32.7% (35 updates) have been marked down as "beats" and 28% (30 releases) as a "miss".

Were these numbers to remain unchanged by the end of next week, August 2023 would rank among the better result seasons locally as total beats seldom reach higher (36% in August 2020 is the highest to date) but equally the percentage of misses is usually a lot smaller.

In what might be an ominous signal, the gap between beats and misses has been narrowing as more company results are being released.

At the very least, the two high percentages on both opposing sides illustrate yet again the Australian economy, and by extension the Australian share market, remains extremely polarised. And the huge gap between the winners and losers is not only determining different outcomes between segments and sectors, it is also separating the stronger from the more vulnerable inside sectors.

The first three weeks have already delivered plenty of examples:

-Yet another strong result from REA Group ((REA)) was followed up by a disappointing performance from second in ranking, Domain Group Australia ((DHG))

-CommBank's ((CBA)) resilience outshines analysts' responses to Bendigo and Adelaide's ((BEN)) FY23 release and guidance, though CBA shares have underperformed since

-Retailers JB Hi-Fi ((JBH)), Nick Scali ((NCK)), Premier Investments and Super Retail ((SUL)) once again confirmed they are among the better operators locally

-Goodman Group's financial performance once again solidified its position as the prime sector leader on the ASX

-All of Audinate Group, Carsales ((CAR)), Cochlear ((COH)), James Hardie ((JHX)), Netwealth Group ((NWL)), and Pro Medicus ((PME)) yet again proved a premium valuation can be sustained on persistent operational strength

More Downgrades For FY24

A general observation up to this point is that corporate performances have been far more resilient than had been feared beforehand, in line with the domestic and international economies that have proved to be rather resilient too.

Two very important factors need to be added to keep things into the correct context:

-Earnings estimates have fallen quite dramatically over the year past. Without analysts adjusting their estimates significantly lower, the large majority of companies reporting would be missing forecasts this season

-While circa 72% of reports is either meeting or beating expectations, more 'misses' are happening with forward-looking guidances and forecasts

To illustrate the big gap between FY23 results (in the past) and FY24 forecasts (the future), quant analysts at Barrenjoey report FY23 EPS numbers have beaten forecasts in 28% of releases versus 12% misses. But on FY24 EPS forecasts, only 13% of upgrades have been registered against 31% downgrades.

To some, like the market strategists at UBS, this heavy skew towards more downgrades for expectations in the year ahead is at least partially the result of business leaders adopting a more cautious approach. It cannot be ignored, however, many a company that is still performing well up until now has been noticing slower momentum throughout June-July-August.

It is still possible that analysts downgrading forecasts for the year ahead are being too cautious, but we won't know until after the February results season next year, if not six months later. As things stand today, the aggregate average EPS for corporate Australia (ASX200) is projected to grow at no more than 1.8% in FY23, a number likely to decline over the two weeks ahead.

More downgrades than upgrades for FY24 means the reference EPS for the coming year has now sunk to -5.4% on Morgan Stanley's assessment.

The good news is, EPS growth numbers look a lot better for FY25 (up 5.4%) and for FY26 (up 4.7%), though these projections usually come down over time.

In terms of general valuations, the average PE ratio for the ASX200 now sits marginally below 15x on FY24 forecasts, which remains above the circa 14.5x long term average. But, as everyone is probably aware of by now, underneath any generalised market average these days hides extreme bifurcation at the individual company level.

Also interesting is that financial results to date have been underwhelming at the sales level, suggesting the pressure is real for most companies, with managing costs and passing inflation on to end users responsible for better-than-expected profits overall – or should that be more accurately: not-as-bad-as-feared?

On UBS's number crunching, to date twice as many companies have issued negative guidance versus a positive outlook. Statements issued appear to be guided by challenges for further top line growth, whereas the number one challenge so far this August appears to be the ability to control costs.

One sector that stands out already through mostly margin disappointments is the local media sector, with Macquarie analysts identifying each of Domain Holdings, Southern Cross Media ((SXL)), Seven West Media ((SWM)) and Seek ((SEK)) as having updated with weaker-than-expected margins.

Macquarie also points out the defensives are largely releasing disappointing or unimpressive results, though this generally does not inflict heavy sell-offs to share prices. Think Amcor ((AMC)) and Orora ((ORA)), but also Telstra ((TLS)) and Spark New Zealand ((SPK)), and Endeavour Group ((EDV)).

Casting our net wider, there's probably an argument to be made one should equally include the likes of Aurizon Holdings ((AZJ)), CSL ((CSL)), Sonic Healthcare ((SHL)), the insurers, and many of the local REITs as local defensives. Admittedly, not one amongst them has to date genuinely delivered a big positive surprise.

On Macquarie's assessment, the underlying operational skew appears to be less favourable in comparison with February or August last year, with many of the disappointments linked to margin weakness. It is Macquarie's observation that margin pressure is one of the key culprits responsible for disappointing outlooks provided by companies this season.

Measured against forward-looking guidances, the A-REITs stand out above all other segments with some 50% of financial updates from the sector including negative guidance as more expensive debt combines with higher costs and top line pressures.

The sector also continues to devalue asset valuations, opening up balance sheet pressures that might result in forced asset sales.

Dividends Under Pressure

More disappointments from local REITs are shining a light on one of the key negative developments to date from the current season: dividends and distributions for shareholders.

Australian investors have been truly pampered through ongoing dividend increases in recent years, as exceptional circumstances for iron ore producers made each of BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG))  Top Ten dividend payers globally.

In nominal terms, BHP had become the world's largest dividend payer, beating banks locally and everywhere, as well as the world's largest technology companies listed on Wall Street. But iron ore's price peak above US$200/tonne is now well and truly in the past, which has made those dividends from the past unsustainable.

Those dividends have now dropped by -40% and more, creating significant overhang for Australian dividends and distributions in aggregate. Hence the general forecast is for total payout to shrink in 2023, even though Australian banks will still be adding sizeable increases, as also shown by CommBank and 'Bendelaide' this month.

However, the first 107 corporate releases this month are suggesting there's a lot more happening than simply the impact from a weaker iron ore price; even more so for the year ahead than for the six months past. Consider Barrenjoey's assessment that when it comes to dividends for FY24, 19% in upgrades compares with 33% in downgrades.

On Macquarie's numbers, no less than one third of companies reporting have lowered their dividend outlook by at least -5% with only 4% of companies issuing material upgrades.

On FNArena's observation, the number of payout disappointments to date far outweighs the small number of positive surprises. The latter predominantly relates to AGL Energy ((AGL)), AMP Ltd ((AMP)) and Super Retail ((SUL)), plus a few others.

On the negative side, we find the coal miners even though both Coronado Global Resources ((CRN)) and Stanmore Resources ((SMR)) are believed to be hoarding cash for the potential acquisition of BHP assets.

But all of the ASX ((ASX)), Aurizon Holdings ((AZJ)), Challenger ((CGF)), Computershare ((CPU)), QBE Insurance ((QBE)), Rio Tinto, Seek ((SEK)), Sonic Healthcare, Suncorp Group ((SUN)) and Transurban ((TCL)) disappointed with their dividend announcements.

Not to mention the likes of Adacel Technologies ((ADA)), Adairs ((ADH)) and Iress who decided to not pay out anything for the six months past.

The irony is that Australia, otherwise known as the Dividend Capital of the World, is now poised to weigh down global dividend projections this calendar year and next.

A recent estimate by S&P Global Market Intelligence projects global dividends to remain flat in 2023, carried by a 2.7% increase in the US and 5% in Europe, with a pull back in the order of -2.2% for Developed Asia-Pacific with Hong Kong SAR and Australia the main culprits.

S&P Global estimated total payout in Australia will decline by -6% this year. Judging by the trends thus far this August, Australian shareholders should not expect things to improve in the year ahead.

Incidentally, as also observed in similar situations in the past, when things turn genuinely challenging globally, Australian companies cut their dividends in (much) larger chunks, an observation last made during the covid pandemic in 2020.

Outlook Negative, With Plenty Of Silver Linings

One of the stand-out features of the August results season has been the resilience of household spending in Australia, which proved pivotal in keeping the balance of the season skewed towards not-as-bad-as-feared outcomes from discretionary retailers in particular.

But to me the bigger issue that surfaced throughout the month was how vulnerable our traditional defensives turned out to be in the face of higher input costs, skilled labour shortages, rising wages, rent increases, and costlier debt.

Ahead of August, I worried about extreme volatility and relentless punishment in case of perhaps only mild disappointments. That inkling has certainly been proven correct. On UBS's assessment, August 2023 has been one of the most volatile and challenging reporting seasons in local history.

And traditional defensives have played an active, prominent role in contributing to August's notable spike in share price volatility as the likes of Coles Group ((COL)), Endeavour Group ((EDV)), Ramsay Health Care ((RHC)), Transurban ((TCL)) and Telstra ((TLS)) all managed to disappoint one way or another, leading to immediate selling pressure once their financial results had been communicated.

As a group, Defensives have largely trod water post covid and lockdowns, and some, including Coles, Ramsay Health Care and APA Group ((APA)), have no doubt left many a loyal shareholder with a sense of dissatisfaction as shares are today trading at levels last seen during pre-covid years.

This is quite remarkable and I suspect surprising to most investors and share market strategists given the rapid reset in global bond yields and central bank cash rates over the past 20-plus months, triggering widespread anticipation of much slower growth ahead for economies across the globe.

In such an environment, Investing 101 tells us defensive assets and businesses should be on investors' target list to preserve capital, secure income, avoid major disasters and still achieve at least moderate capital gains.

But this time around the overall defensive experience has been underwhelmingly mixed at best, and that's assuming portfolios were not overly exposed to Coles, Ramsay Health Care or ResMed ((RMD)) which recorded share price falls of respectively -12%, -12%, and -24% just in August.

It remains yet to be seen whether disappointment to date makes investors more apprehensive towards this segment on the local share market. Post August, corporate Australia is forecast to be en route for negative profit growth, on average in aggregate, and for less dividend payouts over the twelve months ahead.

Not exactly an environment in which defensives cannot or won't make a come-back, especially given most of the post-covid headaches are seen to be reducing already.

Within this context, I note model portfolio managers at Wilsons recently added Amcor ((AMC)), believing those shares are now poised for outperformance as the valuation looks attractive and further downside for earnings is seen as unlikely.

(Un-)Healthy Healthcare

Apart from supermarkets, the country's largest telco and utilities, the local healthcare sector has been for many years the logical go-to destination on the ASX when times became tougher, but healthcare yet again produced multiple prominent disappointments this August season.

ResMed, the world's number one manufacturer of CPAP devices assisting people with sleep apnoea, missed market forecasts by some -5% on slower-than-anticipated margin recovery, but its share price has undergone a seldom witnessed de-rating (-24%) as hedge funds and shorters in the US, where the shares are also listed, play winners and losers from immensely popular anti-obesity drugs marketed by Eli Lilly and Novo Nordisk.

Analysts covering the company and its sector believe the assumption that sleep apnoea is simply a result of obesity and that ResMed's growth will be stunted because of popular weight-loss pills is misplaced and misguided, but most investors will be hesitant to catch the proverbial falling knife, instead biding their time and see when exactly those shares find support.

An equally dramatic de-rating has taken place for private hospital operator Ramsay Health Care, long considered to be a Quality backbone stock for investment portfolios throughout Australia. But the long term uptrend on historical price charts has flatlined since 2016, with last month's sell-off pushing the shares to their lowest level since 2014.

Ramsay's disappointment in August has left analysts with a veritable smorgasbord of questions, ranging from the sustainability of higher operational costs (permanently lower margins?), to the hospital operator's true negotiating power versus health insurers, the need to diversify into costly out-of-hospital care, and the company's viable options when governments feel the pressure of budget constraints.

Ramsay's balance sheet is also burdened by a mountain of debt, so no surprise the company is intending to find a buyer for its Asian JV, Ramsay Sime Derby, to provide relief.

Though the shares look on most assessments undervalued, assuming some kind of normalcy can return in due course, Ramsay Health Care has very few Buy-rated believers left among healthcare analysts in Australia. Most experts don't see a quick fix on the horizon, though a sale of Ramsay Sime Derby might be positively received, and prefer to wait-and-see what the future brings along.

Ten times bitten, twelve times shy?

With the notable exception of high quality, small cap superpower-in-ascendency, Pro Medicus ((PME)) and large cap Cochlear ((COH)), healthcare was one sector mostly on the receiving end in August.

All of Ansell ((ANN)), APM Human Services International ((APM)), Audeara ((AUA)), Australian Clinical Labs ((ACL)), Capitol Health ((CAJ)), CSL ((CSL)), Healius ((HLS)), Integral Diagnostics ((IDX)), Monash IVF ((MVH)), Nanosonics ((NAN)), Polynovo ((PNV)), Sonic Healthcare ((SHL)), Telix Pharmaceuticals ((TLX)), and others in the sector, were unable to awaken the fire in investors' belly.

In contrast with Ramsay and ResMed, analysts are left with a whole lotta less unanswered questions about the outlook for healthcare stalwarts such as CSL, Cochlear, Sonic Healthcare, Monash IVF and some of the smaller representatives, as covid-related headwinds are considered not permanent, and wearing off.

This in itself should prepare the sector for making a "healthy" come-back over the coming 12-24 months, all else remaining equal.

August Revealed The Strong

August revealed the Australian consumer is still remarkably resilient, though a variety of indications were equally provided that suggest the coming months might extend and deepen the true impact from steep RBA tightening.

Nevertheless, investors as well as analysts seem in agreement things might not get as bad as feared, not even when more negative impact is still in the future.

Thus August showed a notable improvement in general sentiment towards retailers such as Accent Group ((AX1)), JB Hi-Fi ((JBH)), Lovisa Holdings ((LOV)), Nick Scali ((NCK)), Premier Investments ((PMV)), Super Retail ((SUL)), The Reject Shop ((TRS)), and Universal Store Holdings ((UNI)).

General resilience in discretionary spending is also feeding into more optimism regarding next year's outlook for Australian banks.

Irrespectively, Harvey Norman ((HVN)) will be kicked out of the ASX100 index on Friday, September the 15th, with popular lithium exposure Liontown Resources ((LTR)) joining instead.

True strength emanated from the insurance sector and from leisure and tourism with the likes of Auckland International Airport ((AIA)), Camplify Holdings ((CHL)), Corporate Travel Management ((CTD)), Experience Co ((EXP)), Flight Centre ((FLT)), Helloworld Travel ((HLO)), Hotel Property Investments ((HPI)), Qantas Airways ((QAN)), and Tourism Holdings Rentals ((THL)) either meeting or beating already high expectations, with strong operational momentum projected to continue into FY24.

Elsewhere, optimists spotted early green shoots for Ardent Leisure ((ALG)), though Kelsian Group ((KLS)) disappointed (yet another carrying the 'defensive' label), and questions remain around the year ahead for hotels and cinemas operator EVT Ltd ((EVT)), also the owner of the ski resort in Thredbo.

Higher Yields Are Negative

Higher bond yields means those with debt are facing a costlier outlook, either today or when debt needs to be refinanced.

This proved one of the recurring negative revelations during August as analysts, generally speaking, had been underestimating by how much exactly the cost of debt had increased for the likes of Amcor, Ramsay Health Care, and numerous others.

The rising cost of debt is in particular a formidable negative for ASX-listed REITs, many of whom are now effectively ex-growth, often through the combination of higher operational expenses, top line pressure, falling asset prices and higher interest from debt.

Under different circumstances, one would expect to see an uptick in asset sales, but these are not normal times for the sector, as also signalled by the Australian Financial Review reporting on Monday some $2.5bn in large shopping centre assets have been for sale in Australia for more than a year – but prospective buyers remain elusive.

A similar conundrum awaits owners of offices. Investors are worried those assets are worth a whole lot less than yesterday's valuations as industry dynamics remain opaque and uncertain.

In the share market, securities of the likes of Cromwell Property Group ((CMW)), Growthpoint Properties Australia ((GOZ)), and Unibail-Rodamco-Westfield ((URW)) are trading well below analysts' underlying valuations, but your average investor is happy to leave any such opportunities to the daring value investor with higher appetite for risk, and unlimited patience.

The A-REITs sector in Australia entails many more sections and options, think industrial development a la Goodman Group ((GMG)), but also childcare centres through Arena REIT ((ARF)), storage facilities, and non-discretionary retail landlords. A number of REITs with such alternative exposures is being re-rated post financial updates in August.

One example is the HomeCo Daily Needs REIT ((HDN)), which is held inside the FNArena/Vested Equities All-Weather Model Portfolio. Its securities have appreciated by close to 12% over the past two weeks, significantly reducing the gap with FNArena's consensus target, which on Monday is still close to 8% higher.

The independently trading HealthCo Healthcare & Wellness REIT ((HCW)) is showing a similar upgrade move, with its securities trading -6.4% below the consensus target. One gets the feeling at least part of the investment community is feeling more confident in the outlook and asset valuations for selected REITs.

The local number one for the sector, heavyweight Goodman Group ((GMG)), has equally received a positive re-rating in August. FNArena's consensus target for Goodman Group only sits a smidgen above the upgraded share price, with the added observation that target is significantly impacted by a much lower contribution from Ord Minnett/Morningstar.

Goodman Group has been an exception among large cap, high quality defensives in August, releasing financial results that attracted virtually no doubt or criticism, supporting ongoing optimism about its future growth potential.

Also, while everyone's attention had been directed towards NextDC ((NXT)), Megaport ((MP1)), Macquarie Technology Group ((MAQ)) and Appen ((APX)) to jump on this year's bandwagon of regenerative AI, it turned out Goodman Group is the AI champion on the ASX.

As one of the world's largest developers of industrial assets, some 30% of Goodman Group's projects under development now consists of new tech data centres.

At the smaller end of the market, investors have equally re-rated technology distributor Dicker Data ((DDR)) with its FY23 financials injecting renewed optimism about the outlook for the company's margins. Dicker Data is the exclusive distributor of Nvidia chips in Australia.

Non-Bank Financials Feeling The Pain

One sector that showcased its fragility and vulnerabilities in August concerns the non-bank financials; small cap lenders and services providers like Pepper Money ((PPM)), Liberty Financial ((LFG)) and Latitude Group Holdings ((LFS)), as well as Resimac Group ((RMC)), MoneyMe ((MME)), Australian Finance Group ((AFG)), and others.

Higher funding costs, increased competition and budget pressures for households have the potential to become kryptonite for the sector overall and financial results in August suggested there's pressure coming from all corners – nobody thinks this is the end of it.

Analysts at Citi are the only ones who've published a general assessment post August results. Unsurprisingly, they remain hesitant and cautious. Credit risk is still up in the air. Citi thinks investors at large will be waiting for a peak and moderation in funding costs in combination with a tangible inflection in volumes.

Earnings forecasts for all companies in this segment have been reduced significantly.

August In Numbers

Having updated on 385 companies, including many more smaller cap companies than in the past, FNArena's Results Season Monitor has designated 111 reports as a "beat", against 167 in line and 107 missing the mark. It is important to note these assessments are not made purely on net profit or earnings per share coming in higher or lower than analysts forecasts.

Any guidance for the year ahead is equally taken into account, as well as specific details that impact on forecasts and valuations post result releases.

Today's numbers will still change in the days ahead, but hopefully not by much. On current assessment, these stats suggest total "beats" have outnumbered "misses" by 28.8% versus 27.8%, but is this genuinely a positive?

FNArena has been monitoring results since August 2013. Over that decade, most result seasons finished with more beats than misses. Usually the gap in favour of beats is a lot wider. Plus estimates had already been significantly reduced prior to the season. Plus estimates have yet again been downgraded noticeably for the financial year ahead.

On current consensus forecasts, the average EPS for the ASX200 is poised for a -6.2% drop in FY24, with the outlook for the ASX100 even worse: -7.2%. A lot of this can be attributed to China and the miners, which marked yet another notable disappointment in August.

Banks and Resources are all-important for the Australian share market, but both sectors can often obfuscate what exactly is going on elsewhere. If we exclude both from forecasts, earnings growth in FY23 stands at circa 9.2% positive and is expected to grow by a positive 8% in FY24.

This does not negate the fact that dividends were often a cause for disappointment in August. On CommSec calculations, 26% of companies cut their dividend, while 47% increased it, and 14% maintained it.

Of the Top 10 dividend payers in Australia, all of BHP Group ((BHP)), Fortescue Metals ((FMG)), Woodside Energy ((WDS)), and Rio Tinto ((RIO)) lowered their payout; which immediately shows why total dividends fell by -2.5% from a year ago. Ironically, on CommSec data more companies than usual paid out a dividend in August; 87% of companies versus a long-term average of 85%.

The general expectation is that total dividends will yet again shrink further by this time next year, also because this time many a REIT will pay out less too.

If we look into the finer details, the difference between "beats" and "misses" comes down to exact 4 results; 111 versus 107. That difference can easily be explained by the discretionary retailers, of which more than 50% (9 out of 17) released a better-than-feared performance last month.

Take out the retailers, and we end up with more misses.

Of more importance is Macquarie's forecast that earnings estimates still have a way longer to travel south before they find a bottom. History suggests shares cannot sustainably rally when earnings estimates are still being downgraded.

Not making the case for the local share market any easier is the observation that valuations, generally speaking, are near an all-time high when measured against bond yields (the so-called Equity Risk Premium or ERP is near an all-time low).

The combination of these two factors is keeping Macquarie cautious in its expectations and portfolio positioning.

Hopefully some of the lessons learned from the August results season can assist us all with navigating the swings and roundabouts in the months ahead.

Conviction Calls & Best Ideas

Portfolio managers at Wilsons have added Amcor ((AMC)) as a potentially returning outperformer for the year ahead, while NextDC ((NXT)) and Cleanaway Waste Management ((CWY)) have both been removed.

While the underlying sentiment for NextDC remains positive, Wilsons suspects most of the gains have been made in the short term from the data centres operator who guided to higher costs ahead in order to bring a record harvest in new demand on line.

The investment thesis for Cleanaway never played out, so that story can be best summarised as "disappointing". Clearly, Wilsons is not of the view that past disappointment will lead to outperformance any time quickly, instead looking for more attractive opportunity elsewhere.

The Portfolio's exposure to Xero ((XRO)) has been slightly increased, with the managers describing it as "one of the most impressive tech stocks on the market".

August 2023 – Winners & Losers

The proverbial cavalry storming over the hill this August reporting season in Australia were the discretionary retailers led by Harvey Norman ((HVN)), JB Hi-Fi ((JBH)) Premier Investments ((PMV)), Super Retail ((SUL)), The Reject Shop ((TRS)) and a number of others.

It wasn't so much an expression of undiluted strength, more a result of analysts downgrading forecasts too deeply while consumer spending did weaken, but remained resilient overall.

This, however, hasn't changed analysts cautious stance, and the jury remains out whether resilience remains the key word for the six months ahead, or whether this process of slowing spending on the back of RBA tightening remains poised for the next leg lower.

Those who keep a close eye on the finer details point out there have been plenty of signals and indications of weakening market conditions in the early weeks of the new financial year, and not only for consumer spending locally.

Witness also the implicit profit warning issued on Monday morning by scrap collector Sims ((SGM)), good for a punishment in excess of -10% on the day.

Viewed from a different angle, the not-as-bad-as-feared August results season was effectively 'saved' by small cap companies.

Small Caps Commanding The Limelight

Out of the 390 corporate results covered in total, the FNArena Monitor put down 112 (28.7%) as a 'beat' versus 109 (27.9%) as a 'miss', with the remaining 169 (43.3%) in line with analysts expectations.

But if we limit ourselves to smaller samples, the numbers turn markedly worse.

For the 44 companies inside the ASX50, total beats number 14; higher than the 12 results in line, but below the 18 results we labeled as a 'miss'. For the ASX200, 160 companies reported and here too, total 'misses' (55) outnumbered total 'beats' (49).

Smaller companies proved better performers in the face of multiple economic challenges. This is not so much an indictment on Australia's blue chips as it is more evidence of a multilayered, bifurcated world in which one sector is finally recovering from covid doldrums while another is feeling the squeeze from higher interest rates and changing spending patterns.

It just so happens that some of the segments facing more tailwinds than headwinds in Australia are populated by smaller sized companies.

One such sector are the contractors and engineering companies servicing mining projects and the energy transition. The largest two representatives on the ASX are Seven Group Holdings ((SVW)) and Worley ((WOR)) with market caps of respectively $10.3bn and $8.9bn, but the numbers shrink pretty quickly thereafter (Seven Group is not a pure-play either).

Pure-plays Monadelphous ((MND)) and NRW Holdings ((NWH)) only have market caps of $1.3bn and $1.1bn respectively and they are seen by many as leaders in a sector that comprises of a few dozen smaller peers. Downer EDI ((DOW)) is larger, but diversified, and reducing its specific exposure to this segment that can be extremely cyclical over time. Mineral Resources ((MIN)) provides services for third party miners as well.

The August season just ended has provided analysts and investors with plenty of clues and indications of better times ahead for this sector, at least in FY24 and potentially FY25 too. A post-August sector update by UBS highlights the strong positive EPS growth profile that seems on offer compared with the overall dismal looking -6.6% for the ASX200 in general.

The sector generally is still battling higher costs and difficulties with finding skilled personnel, but an uptick in capex by miners and energy companies should outweigh the risks and negatives, so the narrative goes. UBS's top picks for the year ahead are Worley, Seven Group, and Imdex ((IMD)).

Plenty of others received positive responses and commentary in August, including Austin Engineering ((ANG)), Chrysos Corp ((C79)), Emeco Holdings ((EHL)), Macmahon Holdings ((MAH)), Monadelphous, and Mitchell Services ((MSV)).

Another market segment that stood out prominently in August was the automotive sector, with companies like Infomedia ((IFM)), GUD Holdings ((GUD)), PWR Holdings ((PWH)), and Supply Network ((SNL)) all commanding the spotlight in a positive fashion. Super Retail is equally part of this industry.

Analysts were most surprised by ongoing favourable conditions for vehicle dealerships, which includes Autosports Group ((ASG)), Eagers Automotive ((APE)), Motorcycle Holdings ((MTO)), and Peter Warren Automotive ((PWR)), as well as novated leasing and vehicle financing through Fleetpartners ((FPR)), McMillan Shakespeare ((MMS)), SG Fleet ((SGF)) and Smartgroup Corp ((SIQ)) as electric vehicles increasingly become a positive feature for the industry.

Small cap analysts at Goldman Sachs also highlighted the better-than-forecast performances, on balance, from smaller cap companies, with the added observation the likes of Dicker Data ((DDR)), IDP Education ((IEL)), Inghams Group ((ING)), IPH Ltd ((IPH)), Maas Group ((MGH)), and ReadyTech Holdings ((RDY)) were given a lot of opportunity to 'beat' because forecasts had been significantly downgraded in advance.

Redirecting the focus to the FY24 outlook, Goldman Sachs' top picks are now Macquarie Technology Group ((MAQ)) -lauded for its strong growth outlook for the next five years- alongside Lifestyle Communities ((LIC)), an all time favourite at the broker, ReadyTech Holdings, which genuinely surprised last month, IDP Education, Life360 ((360)), and TechnologyOne ((TNE)).

The latter company did not report in August but the analysts at Goldman Sachs argue TechOne is currently enjoying its strongest earnings growth outlook in multiple years.

Small cap specialists at UBS have their own preferences, of course, and their Key Picks post August are Autosports Group, Breville Group ((BRG)), Corporate Travel Management ((CTD)), IDP Education, Imdex, Kelsian Group ((KLS)), NextDC ((NXT)), Ridley Corp ((RIC)), and Webjet ((WEB)).

UBS is specifically cautious on Eagers Automotive and G8 Education ((GEM)).

Zooming in on local REITs, Macquarie's small cap favourites are Qualitas ((QAL)), Centuria Industrial REIT ((CIP)), and Arena REIT ((ARF)) alongside large cap favourites Goodman Group ((GMG)), Mirvac Group ((MGR)) and Dexus ((DXS)).

Insurers Enjoying Positive Momentum

One sector outside of the small caps segment that showed its positive features in August was insurance, even though industry laggard Insurance Australia Group ((IAG)) still managed to disappoint following notable price increases communicated in June. Its share price has been further hit by news ASIC is taking the insurer to court for misleading its customers.

Expectations are QBE Insurance ((QBE)) is now shaking off its long history of operational disappointments while Suncorp Group ((SUN)) is everyone's favourite on a solid, growing dividend in combination with a cheap looking valuation, awaiting further progress on the intended sale of the banking business to ANZ Bank ((ANZ)).

Insurers as a group have been one of the stand outs in August in terms of positive revisions for earnings per share (EPS) estimates. Sector analysts don't expect any interruptions to the positive momentum any time soon. The sector also includes Medibank Private ((MPL)) and nib Holdings ((NHF)) for which views generally are more neutral.

Equally, the operational momentum for ASX-listed insurance brokers remains strong into FY24. The best performer both in and post August is AUB Group ((AUB)), but analysts remain equally positive about Steadfast Group ((SDF)) and PSC Insurance ((PSI)).

Market dynamics might not be quite as favourable for the likes of Tower ((TWR)) and NobleOak Life ((NOL)).

In a post-August update, sector analysts at Morgan Stanley suggested the return of an El Nino period could see the insurers temporarily over-earning on drier-than-usual weather, with share prices re-rating in response.

Quality On Top

Investors are trained to look out for cheaply priced bargains, which presents its own set of challenges as stocks often prove cheap for good reason. Less attention tends to be given to Superior Quality that shows itself in multiple ways, including in August.

The first example that comes to mind is the notable difference in operational strength, and the lack thereof, between REA Group ((REA)) and the smaller Domain Holdings Australia ((DHG)). There's no second-guessing as to who's the superior player in the industry; the share price divergence tells the story.

A second example would be the direct comparison between Coles Group ((COL)) and supermarket competitor Woolworths Group ((WOW)). Sector analysts have long been pointing out the latter has built an advantage through investing in technology that will require Coles years to catch up.

That difference showed itself through the lack of protection against an increase in customer theft, whereas Woolworths proved a lot less vulnerable, though its supermarkets are operating in the same market, under similar conditions.

Normally I would also include CSL ((CSL)), and even ResMed ((RMD)), but the healthcare sector in 2023 is very much revealing to investors it is not immune to post-covid pressures and headwinds. Staff costs, wage inflation, a slower recovery in patient visits, balance sheet gearing and rising interest costs; these factors all featured in February and August, and they continue to impact for the year(s) ahead.

Sector analysts at Jarden have labelled it "the great margin reset". It might yet take a while before the investment community gets its head around what the future exactly looks like for a sector that has been loved by many over the past two decades. Jarden's sector favourite remains CSL, "one of the higher quality stocks with multi-year improvements in top line, margin and cashflow".

The analysts would also recommend ResMed, but for the GLP-1 uncertainties. "[…] it remains impossible to quantify the GLP-1 effect, other than it appears overdone. Sleep apnea will not be cured but the role to be played by GLP-1 drugs when considering side effects and cost is difficult to quantify so early into their launch."

Ord Minnett's contribution: "[…] we think the global market is untapped and big enough for CPAP to remain a meaningful solution in addressing sleep apnoea".

Jarden's favourite small cap healthcare stock is Aroa Biosurgery ((ARX)).

On my observation, August did highlight the lower quality companies in healthcare on the ASX, with yet more disappointment from Healius ((HLS)) and with Ramsay Health Care ((RHC)) essentially proving why its share price has been unable to post any sustainable gains post 2016.

Many have been highlighting the private hospitals operator as a post-covid "must have", and many an investor has bought into the "still Quality" narrative, but I have long ago come to the conclusion the Quality tag no longer applies, as is the case with the likes of Iress ((IRE)), Lendlease ((LLC)), Orica ((ORI)), and AMP ((AMP)).

It's probably fair to conclude these Quality tags remain in use long after they no longer apply, and in each example hoodwinked shareholders end up paying the price.

Other companies that showed their Quality characteristics in August include Wesfarmers ((WES)), Carsales ((CAR)), CommBank ((CBA)), Cochlear ((COH)) and Goodman Group among large caps, and Audinate Group ((AD8)), Altium ((ALU)), Breville Group, Dicker Data, Hub24 ((HUB)), IDP Education, Netwealth Group ((NWL)), and Pro Medicus ((PME)) among the smaller caps.

Within this context, I note the cheapest among the large cap banks, Westpac ((WBC)), was seen as releasing yet again the weakest of the large cap trading updates in the sector, while Bank of Queensland ((BOQ)) is considered too risky to comfortably recommend by most sector analysts (even though the shares are looking "cheap").

It remains one of my long-standing observations that Quality businesses tend to outperform their cheaper priced alternatives in the long run, a feature that usually applies even more when market conditions worsen.

Consumer Stocks Not Out Of The Woods

Retailers and other consumer-oriented companies experienced the return of investor interest in June, having sold off a number of times previously on general angst of what exactly the impact from RBA tightening and cost inflation could well be.

At first sight, that pre-August rally proved prescient with most companies at least meeting forecasts, leading to share prices re-rating. But most analysts have remained undeterred and are unwilling to now assume the only way forward includes a general upturn for this sector in broad terms.

Instead, most economists and analysts are suggesting the next six months or so will likely prove the most challenging for companies dependent on household spending in Australia.

Combining the two contrasting factors, sector analysts post August are trying to identify which ASX-listed companies can be given the benefit of the doubt. It goes without saying, there's no general consensus, except maybe for which companies not to own just yet.

On Jarden's approach, which spans the whole gamut of being exposed to consumer spending, the most attractive looking companies are Woolworths, Flight Centre ((FLT)), Corporate Travel Management, The Reject Shop, and Accent Group ((AX1)).

Currently the least attractive, according to Jarden, are Lynch Group ((LGL)), Coles, Adairs ((ADH)), Costa Group ((CGC)), and JB Hi-Fi.

Among defensive plays, Jarden's preference is biased towards Woolworths and Metcash ((MTS)) over Endeavour Group ((EDV)) and Coles.

In contrast, analysts at Morgan Stanley cannot get exited about local companies -at all!- and prefer to be overweighted offshore earners. This broker's most preferred exposures are (again on a broad consumer spending theme) Aristocrat Leisure ((ALL)), Treasury Wine Estates ((TWE)) and IDP Education.

Morgan Stanley's fear is the emergence of a FY24 downgrade cycle for the sector. Among retailers, those carrying an Overweight rating from the broker include Lovisa Holdings ((LOV)) and Breville Group -offshore earners- as well as Premier Investments (offering "strategic value").

Analysts at UBS are more focused on threats such as the rising cost of doing business (CODB) generally and inflation in wages specifically. They are equally cautious about the outlook for discretionary spending. UBS's preference lays with Lovisa Holdings, Metcash, Treasury Wine Estates, and Wesfarmers.

Companies to not own, according to UBS, include Accent Group, Domino's Pizza Enterprises ((DMP)), Harvey Norman, Premier Investments, and Super Retail.

Are Tech Companies Hiding The Truth?

One trend in August that stood out for Macquarie's TMT (Telecom, Media & Technology) sector watchers is the shift towards increased capex spending that previously might have been categorised as opex.

Not that any of this has a direct influence on a company's valuation, but Macquarie suspects technology companies are trying to "protect" their EBITDA numbers, effectively giving investors an impression of better operational momentum by directing some of the operational costs elsewhere in the financial accounts.

Companies that have guided to higher capex in August include Telstra ((TLS)), Seek ((SEK)), Carsales, Domain Holdings Australia, Nine Entertainment ((NEC)), Seven West Media ((SWM)), Altium, Appen ((APX)), NextDC, and Wisetech Global ((WTC)).

Companies that increased capex guidance in combination with lower opex include REA Group, TPG Telecom ((TPG)), News Corp ((NWS)), IDP Education, and Audinate Group.

It is also Macquarie's observation investors were all too willing to reward strong top line growth momentum, as well as the structural growers in the sector.

Macquarie's key picks are Telstra, Carsales, Seek, and NextDC, while the two key no-nos are Domain Holdings and Appen.

August Not The Worst

In thirteen years of closely monitoring corporate results in Australia, only two seasons registered more 'misses' than 'beats'; it happened the first time in August 2019, when the outlook for the Australian economy was deteriorating quickly, and a second time in February this year.

August 2023 saw total beats slightly outnumber total misses; by 3 results exactly (112 versus 109). While this is far from fantastic, in direct comparison with the February outcome earlier in the year it is an improvement, though maybe not to the extent we're all ordering champagne for the post-season analysis.

What equally counts is the average EPS forecast has now sunk to -6.6% for the ASX200, while dividends are also expected to drop in aggregate (possibly by -8%). If correct in twelve months' time, this will mark one of the weakest performances for corporate Australia in a long while, outside of covid-impacted 2020 and the GFC.

Five sectors are forecast to see average EPS retreat in the year ahead: consumer staples, energy, financials, materials and real estate. These sectors represent circa two thirds of the ASX's total market capitalisation. On Ord Minnett's observation, only healthcare, industrials and utilities are showing profit stability.

Morgan Stanley, on the other hand, warns there's major risk in current forecasts for industrials, which represents a rather broad basket ranging from Transurban ((TCL)) to Dalrymple Bay Infrastructure ((DBI)), also including A2B Australia ((A2B)), Kelly Partners ((KPG)), Freelancer ((FLN)), and lots more.

In contrast, the valuation of equities, on average, both against bonds and versus long term references, is above average. Locally, the PE ratio for the ASX200 sits around 15.5x, some 100bp above the long term average. It is precisely the valuation that has many a market analyst uncomfortable, in particular when taking into account the possibility of more rate hikes and deteriorating economic momentum.

One explanation is that markets are looking forward to when the economic upturn and the commensurate recovery in earnings announces itself. It also means there's the always lingering risk that in case of disappointment, the subsequent sell-offs can be larger than otherwise might have been the case.

This possibly explains the rather mediocre share price responses that have been observed both in Australia as well as in overseas markets in response to corporate results recently. On the one hand markets showed no hesitation to punish at times even the slightest form of disappointment, while the appetite for outsized rewards in case of an earnings beat often proved temporary or not present at all.

While total dividends are expected to shrink further in FY24, it's worth pointing out dividend announcements in general actually surprised for the season. This marks yet another difference with February when the balance had tilted to net disappointment. Regardless, Ord Minnett has singled out consumer staples, real estate and communication services as sectors disappointing on dividend payouts.

Ord Minnett believes standout results were delivered by AUB Group, Brambles ((BXB)), Breville Group, Carsales, Cochlear, Goodman Group, GUD Holdings, Hub24, Inghams Group, Megaport ((MP1)), REA Group, and Wesfarmers.

The combination of all of the above has led to some rethinking in strategies and portfolio compositions, which will be the central theme in my next follow-up.

Navigating The Post-August Complexities

Active fund managers. They are usually brimming with optimism because, as some like to remind us all, pessimists don't make much money.

Yet, at a recent industry panel conversation none of the managers on stage expressed anything other than caution and trepidation for what investors should expect from the Australian share market in the next 12-18 months.

The same reluctance dominates most strategy updates post-August from investment banks and stockbrokers; there are no repeats of the more dire warnings some issued in early 2022, but all seem to temper what could be too-high expectations for the months ahead.

This might somewhat surprise for it is not as if the local share market has rallied hard this year. After a slightly negative return for 2022, year to date in calendar 2023 the ASX200 Accumulation index is up circa 6% but half of that stems from dividends. The ex-dividends gain of less than 3% could easily disappear throughout what is traditionally the weakest period of the year up until mid-October.

The recent August results season in Australia wasn't an all-out inspiring event, but any massacres remained confined to individual companies and, overall, there have been plenty of positive surprises on forecasts that had become too cautious.

The main worry, however, is more directly linked to asset valuations generally.

We need to talk about valuations

In your typical industry lingo, we're now talking about the Equity Risk Premium, short cut ERP. This is the mathematical comparison investors apply for listed equities relative to government bonds. The higher the ERP, the lower the valuation and return from equities. What has many an expert puzzled is how low this ERP has become, and nobody genuinely knows why.

Traditionally, during times of heightened risks and uncertainties, share markets price in a higher ERP which equals cheaper share prices to account for the extra risk of disappointment, but this time around the ERP has simply shrunk, and shrunk further. The good news, as we all witnessed over the past 18 months or so, is that none of the more dire scenarios have (thus) played out.

The flipside of this market observation, as explained in a recent strategy update by UBS, is that the ERP for US equities has only been lower on two occasions over the past one hundred years; in the late 1920s/early 1930s and in the late 1990s/early 2000s. As every investor knows, in both cases what followed next is best avoided as first followed the Great Depression and later on the bursting of the TMT bubble.

Nobody is making any such prediction this time around, also because the ERP is not a reliable instrument for timing the next downturn. But UBS strategists do make the point historically there is a "decent" relationship to medium and long term investment returns. Whenever equities have in the past been priced as expensively, relative to bonds, the return for the following decade has only been a paltry 3% per annum.

Australia's Trading Range

In Australia, the relative valuation of the ASX200 is equally higher than what history suggests, as also signalled by the index's average Price-Earnings (PE) ratio of circa 15.4x. Historically, the average PE is circa -100bp lower around 14.4x.

Equity valuations don't exist in a vacuum, of course, which is all too often a mistake made by investors. What supports share prices, or otherwise, are forecasts for profits and dividends. Here the recent August results season has once again presented investors with a true smorgasbord of corporate strengths and weaknesses that have led to changes in how analysts and strategists view opportunities and risks for investors locally.

Ever since share markets bounced off their lows late last year, the ASX200 has remained inside a trading range that has seen the index rally towards 7600 and fall to 6900. More often than not rising and falling bond yields have been the prime instigator.

With most economies expected to weaken in the quarters ahead, Economics 101 suggests a pause in central bank tightening should lead to lower bond yields, but then the rally in oil prices might trigger a spike higher in inflation yet again.

What has managers and strategists cautiously optimistic for the year ahead is the fact that lower bond yields should provide support for equities, as they have done on multiple occasions already this year. The offset is slowing economic growth will put current profit forecasts to the test.

There is, of course, no silver bullet to avoid share market turbulence and, reading between the lines of expert views and assessments, market volatility is here to stay for the foreseeable future. One way to deal with it is through more active buying and selling, as recommended by some.

Lessons From August

One of the key features that separated Winners from Losers in August was the ability for management teams to control costs and protect the profit margin. A cautiously optimistic Wilsons believes corporate results have provided plenty of indications that cost pressures are abating and thus Australian companies should start benefiting from a recovery in margins.

Screening the ASX200, Wilsons analysts have identified nine companies that are poised for margin recovery. Their favourite is Collins Foods ((CKF)), which has been added to the Focus Portfolio, a basket of high conviction ASX-listed exposures.

The other eight are: Amcor ((AMC)), ARB Corp ((ARB)), Bapcor ((BAP)), Boral ((BLD)), Domino's Pizza ((DMP)), James Hardie ((JHX)), Reliance Worldwide ((RWC)), and Wesfarmers ((WES)).

But in a share market that is at the index level forecast to possibly make no net gains by mid-2024, outperformance throughout the year ahead might well be determined by what is not owned in the investment portfolio.

One favourite basket for the nomination of Sell ratings remains the ASX-listed retail sector, despite the fact those companies surprised most in August.

Goldman Sachs just reiterated its Sell ratings for Coles Group ((COL)), Domino's Piza ((DMP)), and Premier Investments ((PMV)). The underlying narrative to retain a cautious stance generally on companies overly exposed to consumer spending domestically is that RBA rate hikes still haven't been fully passed on to mortgage holders in Australia, while large parts of the country are by now running out of savings.

UBS suggests investors best avoid big ticket retailers with its analysts reserving a Sell rating for Harvey Norman ((HVN)), and also for Accent Group ((AX1)), Domino's Pizza, Premier Investments, and Super Retail ((SUL)).

Sector analysts at Canaccord Genuity have labelled the market's response a "low quality sentiment rally" but are still prepared to stick with Buy ratings for Lovisa Holdings ((LOV)) and Dusk Group ((DSK)).

Could there be an opportunity in smaller cap stocks that have lagged their larger peers? Stockbroker Morgans suggests investors should broaden their view, away from local large cap technology companies a la Wisetech Global ((WTC)) and Xero ((XRO)), and screen for better value in the smaller cap space instead.

Morgans likes AI-Media Technologies ((AIM)), Ansarada ((AND)), Attura ((ATA)), Objective Corp ((OCL)), and, still, Siteminder ((SDR)). The latter has put in one mighty rally since July.

While punishments for disappointment in August have been harsher for smaller cap companies, analysts at Morgan Stanley do point out the growth outlook appears better for smaller caps in comparison with the constituents of the ASX100. From this perspective it makes sense to at least consider smaller cap companies for portfolio inclusion for the year ahead.

Equally interesting is that ResMed ((RMD)), whose shares have sold off a whopping -30% on a disappointing quarterly margin and speculation about competition through weight loss drugs from Eli Lilly and Novo Nordisk, has continued to garner support from local fund managers and healthcare sector analysts.

Not that any of it has stopped the share price decline to date.

Those strategists who had picked ResMed as one of their core holdings for the year ahead are sticking with their choice. Fund managers who weren't necessarily paying attention are definitely now. Healthcare analysts continue to express their surprise about the sudden selling pressure and their support for the shares medium to longer term.

Healthcare analysts at Macquarie retain ResMed as their second most favoured exposure on the ASX, behind CSL ((CSL)) and ahead of also-favourites Monash IVF ((MVF)) and Regis Healthcare ((REG)).

Macquarie's response: "We see the growth outlook as favourable, supported by increased new patient set-ups and share gains, with potential upside from outcomes associated with the Philips consent decree. Current valuations are near 10-year lows reflecting concerns in relation to GLP-1 RA which we see as overstated."

The over-arching issue remains that demand for GLP-1 drugs from both manufacturers is in a steep hockeystick up-trend and everyone can have a big guess as to how, to what extent, and when exactly this might impact on ResMed's sales trajectory.

The healthcare sector in general has -uncharacteristically- been one of the underwhelming performers throughout the August results season. However, market forecasts suggest the sector can continue to recover from its post-covid slump while other sectors feel the impact from slower economic momentum.

A late cycle set-up (if that's what we are experiencing) traditionally can be very unkind to energy producers, miners and other cyclical companies, but supply reductions by OPEC and Russia, and successful stimulus in China, can potentially shape a different scenario for the months ahead.

One observation is resource analysts have started to yet again adopt a stronger-for-longer view for iron ore pricing, triggering upgrades for the likes of BHP Group ((BHP)), Fortescue Metals ((FMG)) and Rio Tinto ((RIO)) recently. Those in favour of more gold exposure are equally turning more enthusiastic.

Macquarie, for one, remains constructive on lithium pricing over the medium to longer term, while acknowledging prices are likely to remain volatile in the here and now.

On the other hand, recession calls for European countries including France and Germany are gaining more traction while a recent survey by S&P revealed some 60% of investment managers remain convinced the US economy will still experience a mild recession, exact timing unknown.

In contrast with Australia where the bias for earnings estimates remains negative, in particular for the top end of the market, forecasts in the US have started to rise again on stronger-for-longer economic scenarios, though the advent of artificial intelligence is already making an impact too.

It's Complicated

Taking a helicopter view, Barrenjoey assures investors the outlook both in Australia and abroad remains "complex" as the lagging impact from significant tightening by the world's central banks is taking longer than expected.

Barrenjoey's preferred portfolio exposures try to combine all of the above, representing a non-typical set-up to deal with the complex environment ahead.

With a Neutral weighting to Consumer Staples, Barrenjoey's portfolio has Overweighted exposures to Energy, Insurance, Healthcare, Telecommunications, Mining, and Industrials. Remaining out of favour: Consumer Discretionary, Utilities, Technology, Online Classifieds, Builders, and Banks.

Best Ideas and Conviction Calls

Goldman Sachs' list of Conviction Buys in Australia and New Zealand currently consists of nine ASX-listed companies:

-Endeavour Group ((EDV))
-Fisher & Paykel Healthcare ((FPH))
-Lifestyle Communities ((LIC))
-Macquarie Technology Group ((MAQ))
-Qantas Airways ((QAN))
-REA Group ((REA))
-Rio Tinto
-Woolworths Group ((WOW))


Over at Morningstar, the list of Best Buy Ideas includes the following 11:

-a2 Milk Co ((A2M))
-Aurizon Holdings ((AZJ))
-ASX ((ASX))
-Kogan ((KGN))
-Lendlease Group ((LLC))
-Newcrest Mining ((NCM))
-Santos ((STO))
-TPG Telecom ((TPG))
-Ventia Services Group ((VNT))
-Westpac Banking ((WBC))


Barrenjoey works off eight different themes:

-For Commodities; Lynas Rare Earths ((LYC)), Predictive Discovery ((PDI)), Santos, and Worley ((WOR))
-Best-in-Class global franchises: Aristocrat Leisure ((ALL)), CSL, GQG Partners ((GQG)), Wisetech Global, and IDP Education ((IEL))
-Price inflation: Brambles ((BXB)) and Metcash ((MTS))
-Critical software: Hansen Technologies ((HSN))
-Leverage to interest rates: Latitude Financial Group ((LFG)), National Australia Bank ((NAB)), and QBE Insurance ((QBE))
-Cheap growth: Pinnacle Investments ((PIN)) and Seek ((SEK))
-REITs: Charter Hall ((CHC))
-Corporate restructuring: Premier Investments


Morgan Stanley's Australia Macro+ Focus List still hasn't changed since late January this year. The ten constituents thus remain:

-Aristocrat Leisure
-Goodman Group ((GMG))
-IDP Education
-Macquarie Group ((MQG))
-Northern Star Resources ((NST))
-Rio Tinto
-Suncorp Group ((SUN))
-Telstra ((TLS))
-Treasury Wine Estates ((TWE))


Macquarie's recommended Growth Portfolio:

-Aristocrat Leisure
-Computershare ((CPU))
-Goodman Group
-Carsales ((CAR))
-Pilbara Minerals ((PLS))
-The Lottery Corp ((TLC))
-Mineral Resources ((MIN))
-Northern Star
-Flight Centre ((FLT))
-NextDC ((NXT))
-Cleanaway Waste Management ((CWY))
-Steadfast Group ((SDF))
-Ramsay Health Care ((RHC))
-Netwealth Group ((NWL))


Macquarie's recommended exposures for an Income Portfolio:

-ANZ Bank ((ANZ))
-Suncorp Group
-National Australia Bank
-CommBank ((CBA))
-Westpac Banking
-BHP Group
-Coles Group
-Atlas Arteria ((ALX))
-APA Group ((APA))
-GUD Holdings ((GUD))
-Aurizon Holdings
-Premier Investments
-Deterra Royalties ((DRR))
-GPT Group ((GPT))
-Charter Hall Retail REIT ((CQR))


Wilsons' Focus Portfolio has added Collins Foods, as reported earlier. To accommodate the extra inclusion, the portfolio trimmed its holdings in James Hardie and Telstra, now the InfraCo sale has been put on hold.

(Do note that, in line with all my analyses, appearances and presentations, all of the 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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