Rudi’s View: What Can August Deliver?

This story features ANSARADA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: AND

In this week's Weekly Insights:

-What Can August Deliver?
-Morgan Stanley's August Season Hot Picks
-FNArena's Corporate Results Monitor
-All-Weather Portfolio FY24 Review
-Video: Why FNArena & All-Weather Stocks

By Rudi Filapek-Vandyck, Editor

What Can August Deliver?

As August beckons, and analysts and investors are preparing for what promises to be a 'lively' reporting season, the market seems to pay no attention to the fact disinflation has become a rather stunted process in Australia, unlike other countries, and yet another CPI release that reveals more of the same might well trigger another RBA rate hike in August.

Goes without saying, a share market that refuses to lay down, other than the occasional hiccup, doesn't seem to be priced for another negative surprise from the RBA, though such an unwelcome development is not guaranteed, of course.

We shall all find out more on July 31, when the local CPI numbers become public knowledge.

Analysts at Morgan Stanley think the RBA rate hike risk is larger than current price action is suggesting. They reminded investors on Monday the CPI in Australia has now accumulated for five consecutive months without declining. If this week's CPI print doesn't show weakness, and Morgan Stanley's forecast is essentially for little movement since the prior update, that'll make it six months of no noticeable decline.

Can the RBA stomach six months of stasis amidst a public debate about the economic stimulus coming from tax cuts and energy bill subsidies? The Trimmed Mean is expected to rise by 1% QoQ, which would see the annual rate of Trimmed Mean inflation remain at 4.0% YoY, above the RBA's own forecast of 3.8% for June.

Maybe Morgan Stanley's concern is unfounded and local market participants have adopted the view that even if the RBA decides to tighten, compensation is already in the pipeline through less tax and lower energy bills?

A share market that refuses to weaken meaningfully remains, of course, priced above historical averages. This need not be a major problem, not when there's no economic recession on the immediate horizon, but when valuations are high, the bar is automatically lifted for corporate results, and companies better deliver, or else.

The safest prediction to make is that overall volatility will rise, and probably by a lot in the weeks ahead. This week's CPI and the RBA meeting in August are each potential triggers, but there'll be plenty to digest and to absorb throughout August.

Trends might seem straightforward when markets follow macro-economic indicators or broad top-down narratives, but when companies report their financials theoreticals and reality meet, and that can be vindicating and re-affirming as much as it can wipe out everything that has happened up until that point.

Corporate results matter. They provide confidence that everything is okay, or that the future will be okay. That confidence will be put to the test in August. And as history shows, the outperformers are not by default destined for failure and disappointment, no matter how hard some investors would like this to be the case, just like laggards might prove to be mis-priced, but not necessarily by default, and certrainly not all of them.

Corporate Results In The USA

Results season is also when first impressions can be quite deceiving, as we've all witnessed in the US last week with share prices in Tesla, Alphabet (Google) and UPS (among others) weakening upon quarterly market updates, pulling indices down, but does this mean corporate profits are not living up to expectations in the world's most important market?

A cursory glance over the underlying statistics suggests US corporate profits are still doing fine. Some 79% of all reporters in the S&P500 is still managing to beat consensus on EPS, though only 58% is able to do so on sales.

The latter clearly indicates the US economy is slowing, but also that businesses are struggling with falling inflation, but higher costs and more reluctance in spending, which is also corroborated through transcripts of post-result conference calls between CEOs and professional investors.

Only 50% of US companies is currently able to beat consensus on both sales and EPS.

Analysts at RBC Capital observe how little changes are being made to analysts' EPS forecasts, with consensus numbers essentially holding steady for this year and next around US$244 per share on average for the S&P500 in 2024, and US$278.50 for next year.

On numbers from S&P Global Market Intelligence, the current Q2 reporting in the US is actually increasing analysts' forecasts for EPS growth with Q2 growth currently averaging 9.27% compared with expectations of 8.29% EPS growth pre-season (one month ago).

The biggest gainers, as far as market forecasts are concerned, are US Financials whose EPS growth has been revised up to 14.38% from 3.74%. But even IT is still experiencing net upward revisions with sector EPS growth now at 16.93% from 15.97%. The worst hit sector is Energy, where EPS growth has weakened to minus -1.76% from a positive 11.90%.

So far there has been no big deflation in growth forecasts for large cap winners, Gen.Ai or otherwise, and that creates one big question mark for those predictions about a new, multi-year era featuring a shift in market leadership in favour of small caps, cyclicals and 'value' in general.

August Is Key For Australia

What we are experiencing is merely a re-adjustment in portfolio weights and exposures, which probably has further to run. But as investors have already witnessed locally in Australia, many 'value' laggards that should benefit from a shift in central bank policy (though that's not yet on the cards locally) are also the ones that continue to struggle with cost overruns, higher spending on capex and opex, and other operational challenges.

This is why the upcoming August results season might well prove more important than in previous years. Part of the investor community is positioned for a so-called Great Rotation into small caps and other laggards, but for such a switch to become sustainable, corporate results must be strong and healthy enough to maintain investor confidence.

We won't know until we see the details. Until then, investors can but speculate and theorise, and debate the affirmatives and negatives on social media and elsewhere. The local results season starts this week with smaller caps Ansarada ((AND)), Credit Corp ((CCP)) and Centuria Industrial REIT ((CIP)), but in particular through larger caps Rio Tinto ((RIO)) on Wednesday and ResMed ((RMD)) and Block ((SQ2)) on Friday.

As has become the local tradition, the August season doesn't genuinely ramp up until the 13th, and only floods friends and foes on Thursday and Friday the 21st and 22nd.

The local numbers look a lot different from those in the USA, with market consensus implying the average EPS for the ASX200 will be -3.5% weaker in FY24, with FY25 and FY26 to see positive growth around the long-term average at respectively 5.4% and 5.3%. As per always, any changes in dynamics for commodities can have a significant impact on those projections.

This potential heavy impact is perfectly illustrated through Macquarie's numbers that suggest Australia's EPS will fall by -6% for FY24 and then rise by 10% in FY25 assisted by a 23% upswing for the resources sector.

Among the questions that require an answer in August:

-Is momentum for Financials, including for insurers, financial platform operators and banks, strong enough to support ongoing strength? Analysts remain highly reluctant to project anything positive as yet for non-bank lenders, an observation that also applies for most listed asset managers.

The average forward-looking dividend yield for the ASX200 has now fallen to 3.7% which is well below the historical average of circa 4.5%, no doubt showing the banks have rallied very hard, while some of the commodity producers will be paying out less. Woodside Energy ((WDS)) comes to mind.

-The question for many a multinational: is momentum in offshore markets robust enough to compensate for local challenges? This divergence is popping up in August previews for the likes of BlueScope Steel ((BSL)), Car Group ((CAR)), and others.

-How strong is momentum for Gen.Ai beneficiaries exactly? Expectations remain positive and robust for prime beneficaries Goodman Group ((GMG)) and NextDC ((NXT)), but any positive Ai impact remains up for debate when it relates to JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Dicker Data ((DDR)), and others.

-How many asset write-downs are still forthcoming? Apart from REITs and property developers, it's a 'live' question that also applies to Challenger ((CGF)) and Seek ((SEK)). BHP Group ((BHP)) has already come clean on this issue.

-Who's next to announce more capital management through share buy-backs and extra pay-outs? Expectations remain positive for the banks, but plenty of other companies seem to have plenty of cash and franking credits, including coal companies.

-Where are the EPS downgrades? The underlying trend has stabilised in the weeks past, with even a slightly positive bias, but Macquarie analysts point out August almost always ends up pulling market forecasts lower. The last time August had a positive net impact on EPS forecasts was, apparently, in the higher-for-longer years of 2003-2006.

-Where are the capital punishments? Always a mystery upfront, but oh so painful when it hits the personal portfolio in the moment; that one downgrade that ruins the day. A negatively-biased Macquarie points out responses to US corporate results have been characterised by a negative skew with the underperformance in case of profit disappointment twice as large on average as any reward for a genuine 'beat'.

A lot of attention and appraisals will revolve around corporate margins. Gold producers have continued to generate plenty of disappointments through June quarterly production updates. What about the healthcare sector? Margins are extra-extra important for share prices of CSL ((CSL)), Cochlear ((COH)), ResMed, but also for Integral Diagnostics ((IDX)), and others.

-Can investors be satisfied with the promise of a second-half catch up? Macquarie recently disappointed with its Q1 update, but the promise is for a much improved H2 which will make up for the slower start into FY25. Judging from the share price, investors are backing management in that promise. But can they/will they in case of others under a similar scenario? Companies that come to mind include Ramsay Health Care ((RHC)), Reliance Worldwide ((RWC)), Domain Holdings Australia ((DHG)) and Medibank Private ((MPL)).

-Where is the market completely wrong? There always is a queue of beaten down, out-of favour market laggards for which sentiment has become too bearish and analysts' forecasts too low. This is fertile ground for a 20%-plus rally on the day of result release (in particular when the shorters are on board too). There is, however, also the other end of the market where share prices mimick Wile E Coyote when results are released with numbers well, well, well below expectations.

FNArena's daily updated Short Report: https://fnarena.com/index.php/analysis-data/the-short-report/

-Serious downgrades pre-season are seldom good news. Macquarie analysts report companies for which forecasts fall by at least -20% prior to results season tend to have a higher chance for missing expectations when they release financials. Are currently included in that assessment: Sonic Healthcare ((SHL)), Seek, Ramsay Health Care, IDP Education ((IEL)), Domino's Pizza ((DMP)), Downer EDI ((DOW)), and nib Holdings ((NHF)), as well as Collins Foods ((CKF)), Nufarm ((NUF)), Eagers Automotive ((APE)), and Star Group Entertainment ((SGR)).

Do note: Collins Foods and Nufarm do not report in August.

-On the other side of the ledger, companies for which growth forecasts in advance increase by 20% and more are ususally a fertile group for upside surprises. Macquarie has identified Aristocrat Leisure ((ALL)), Steadfast Group ((SDF)), Pro Medicus ((PME)), ALS Ltd ((ALQ)), and REA Group ((REA)).

Aristocrat Leisure does not report in August.

-There will be more M&A. Market expectations continue to build. Simply look at share prices for Macquarie Group ((MQG)) and Computershare ((CPU)), even the ASX ((ASX)). Guzman Y Gomez ((GYG)) has a few things to prove too.

Next week we'll dig deeper into specific sectors and individual companies.

Morgan Stanley's August Season Hot Picks

Ahead of August, analysts at Morgan Stanley have picked and communicated their six conviction ideas among ASX-listed small and mid-cap companies:

-Jumbo Interactive ((JIN))
-Audinate Group ((AD8))
-Superloop ((SLC))
-Life 360 ((360))
-Premier Investments ((PMV))
-SG Fleet ((SGF))

FNArena's Corporate Results Monitor

FNArena continues its close monitoring of corporate performances by ASX-listed companies.

We are about to close off the Monitor for March-July (53 companies, incl  the banks, ALS Ltd, Aristocrat Leisure, TechOne, Xero and others) and start with a blank sheet as the first results will be released in the coming days.

To stay on top of things: https://fnarena.com/index.php/reporting_season/

The FNArena Corporate Results Monitor includes a calendar, which remains subjected to ongoing updates (scroll down to view it).

Note: paying subscribers have access to all Monitors from the past, dating back to mid-2013. Yes, those were the days!

All-Weather Portfolio FY24 Review

The FY24 review for the All-Weather Model Portfolio has received the green light from compliance at Vested Equities, and can be downloaded here:
https://www.fnarena.com/index.php/download-article/?n=DE2A4552-E2C7-4DC7-0A896CE5CF68ACD8

Prior years:

FY23: https://www.fnarena.com/index.php/download-article/?n=DFC11150-CB36-C777-1AA3EDA640E2F5BF

FY22: https://www.fnarena.com/index.php/download-article/?n=DFE7241B-9CD8-61F1-1602C581A8E539C4

FY21: https://www.fnarena.com/index.php/download-article/?n=DFF82691-E53E-3CF5-17A2337D72CDB54F

Video: Why FNArena & All-Weather Stocks

I've used my participation to the recent InvestmentMarkets' conference to explain how/why FNArena started & what investors get out of it, including research in All-Weathers and Gen.Ai

The video: https://bit.ly/3A1pLuz

FNARENA VIDEO

Dani and I have put together a video to explain our focus (and enthusiasm as investors) for GenAi, the fourth industrial revolution:

https://fnarena.com/index.php/fnarena-talks/2024/07/15/investing-in-genai-the-fourth-industrial-revolution/

SPECIAL REPORT

Earlier this month, FNArena published a 78 pages Special Report on GenAi, the fourth industrial revolution with lots of in-depth insights, forward projections, and useful links to companies for investors in the Australian stock exchange.

This Special Report remains exclusive for paying subscribers. Download your copy via the Special Reports section on the website.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi's Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 9th July, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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. All views are mine and not by association FNArena's see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

Click to view our Glossary of Financial Terms