Brenton Saunders: what to watch in ASX earnings season

As we move into ASX interim reporting season, Pendal’s BRENTON SAUNDERS explains what investors should be looking out for

• Watch for inflation, interest rate effects
• Outlook statements will be critical
• Find out about Pendal Focus Australian Share fund
• Find out about Pendal MidCaps Fund

COMPANY outlook statements will be key to share performance during the ASX’s half-year earnings reporting season, says Pendal’s Brenton Saunders.

Most Australian listed companies will report results for the December half over the next few weeks.

The interim reporting season follows strong market performance in January on the back of China’s rapid re-opening and easing fears of rate rises.

But Saunders cautions that the risk is to the downside in coming weeks. Early evidence suggests the punishment for companies that miss expectations will be greater than the reward for those that impress.

“In general, we expect a complicated reporting season and no real trends,” says Saunders, who manages Pendal MidCaps Fund.

“Comparing year-on-year numbers is going to be quite problematic because last year had interruptions from lockdowns and re-openings.

“Most of the focus is going to be on the outlook statements rather than the results companies produce on the day.

“You might even have companies come out with strong earnings results retrospectively and weak outlook statements and be sold off by a market trying understand what 2023-24 will look like.”

Sectors to watch

The retailers will be the among clearest examples of this phenomenon after a reasonably strong six months of sales through the Black Friday and Christmas periods — but with rising uncertainty about the impact of rising rates on consumption, says Saunders.

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The effect of rising rates will also show up in companies exposed to the housing sector where recent data shows falling home prices and a slowing of home buying activity.

“Housing is the only sector so far where activity has been materially impacted by interest rates so anything housing related has already seen a slowdown,” he says.

“For those companies, it’s more about assessing the extent of the slowdown and how that’s manifesting in the different companies with exposure to that.

“Banks, for example, are now competing heavily to retain mortgage market share as we come to the end of fixed-rate loans locked in at much lower rates.

“Bank net interest margins will probably peak this reporting season and then start rolling off.

“So again, the focus for those companies is going to be more on their outlook statements than on the result that they produce on the day.”

Other financials will be mixed, with some insurers seeing robust pricing and others facing up to the impact of recent severe weather events.

Resources companies should post stronger results on the back of higher commodity prices, with iron and copper prices notably rising materially over the reporting period.

But cost inflation will be among the key concerns for investors in the resources sector with margin compression expected as costs rise.

“Most of those companies are going to be reporting higher profits,” says Saunders.

“But they’ll also be guiding to higher unit costs with cost inflation in the resource sector quite high at the moment.”

Margin pressure will also be the story for many industrial companies: “We can also expect some softer outlook statements.”

Uncertain global backdrop

This half-year reporting season comes against a backdrop of uncertain global macro-economic data which has the markets on edge as investors try to assess the outlook for inflation and interest rates.

“A lot of the macro data is very contradictory. Markets are volatile as investors try to understand which way it’s headed, going from boom to bust with every news item.

“We’re at a bit of a macro inflection. It’s quite a dangerous period.

“The market will be brutal on misses. We’re seeing companies sold off almost disproportionately when they report big misses to consensus.

“And with a couple of exceptions the market is rewarding meets — and beats — less than it traditionally does.”