ASX earnings season: the big talking points

Inflation, interest rates and labour were all big talking points in this year’s ASX earning season, says Pendal mid-caps portfolio manager BRENTON SAUNDERS

• Earnings season better than expected
• But averages hide wide variation
• Find out about Pendal MidCap Fund

ASX-listed companies posted better-than-expected earnings in the full year reporting season, although the averages hid a wide variation in individual results, says Pendal’s Brenton Saunders.

Inflation, interest rates, labour availability and the impacts of and trade working capital increases were the biggest talking points in a reporting season that was complicated by a shifting global macroeconomic environment.

But uncertainty about the outlook for interest rates and consumer confidence has led many companies to be conservative about providing forward guidance, leaving the outlook unclear, says Saunders, who manages Pendal MidCap Fund.

Saunders’s highlights, sector by sector:

Consumer discretionary

A somewhat surprising mix of results for the sector that is traditionally most likely to suffer the effects of higher interest rates.

“Interest rate-sensitive, consumer discretionary stocks have performed much better they might have expected them to in this environment. The impact of higher mortgage rates is yet to be reflected in large parts of discretionary retail.

“We have tell-tale signs of low consumer sales in some areas, but on average, consumer purchases, consumer foot traffic and the ability to retain margin has been good.

Technology

Better than expected results from some of the high-flyers caught the market by surprise.

“There was an element of tech that did really well – some of the racier tech stocks had good results, good cash flow and good prospects – that caught the market by surprise. Unprofitable tech battled more.”

Decarbonisation

Companies in the electrification and decarbonisation sectors performed very well, led by the lithium producers.

“Lithium just powered ahead. From companies that are still in development or exploration to companies that are already producing, we’ve seen some spectacular outcomes. These companies are getting bigger quickly.

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Housing and construction

Home builders and related businesses are clearly starting to feel the effects of higher interest rates, which has shown up in their reluctance to provide earnings guidance for 2023.

“They are being very conservative about guidance and their ratings are starting to face some headwinds.”

Banks

The banks were disappointing and mostly failed to translate higher interest rates to earnings.

“Competition and costs remain a big impost for the banks. That was that was quite disappointing pretty much across the board.”

Mining and energy

Energy was understandably strong given the higher global prices for oil, coal and gas because of the Russia Ukraine conflict.

“Both the refiners and the energy producers are cycling very high historical prices and had bumper profits and record of dividends.

“The energy sector has transformed itself very quickly from, in some cases, pretty highly leveraged to unleveraged and paying strong dividends in a very short space of time.”

Saunders expects this sector to remain a beneficiary of the ongoing Russia-Ukraine conflict and associate supply chain disruptions.

Infrastructure and contracting

This sector is benefiting from a lot of new work being tendered by government as well as the from the mining, energy and renewables sectors. The negatives are high labour cost and raw material inflation.

“Most are seeing high amounts of work available for tender and larger contract books. There is a mix in terms of margin performance with high labour cost inflation proving a headwind to some. Available contract work in the space is likely to remain elevated especially in mining, energy and renewables.”

Where to next?

The outlook is complicated by global macro-economic events, Saunders says.

“The market came into reporting season in a frame of mind that we had seen the worst of bond yields, inflation was slowing, and the Federal Reserve interest rate policy would moderate, he says.

“The market was quite heavily positioned for that.

“Following the Jackson Hole meeting, with Federal Reserve commentary was much more hawkish the whole narrative changed in a very short space of time.”

Saunders says from a portfolio construction perspective, investors continue investors should continue to exercise caution with hawkish US monetary policy being reinforced at the Jackson Hole Meeting. The interest rate cycle has more to run.

“You’ve had very wide divergence in performance. Look for stocks that are either beneficiaries of the move higher in interest rates or those whose business are not overly geared to higher rates and have been heavily sold off year to date.”

The sharp rally in mid-June shows how quickly the market can bid up oversold companies, but the macro outlook remains mostly depressed, he says.

“It’s very much an alpha kind of environment, where staying across stock specifics is not only useful, but also an absolute necessity.”