With reporting season offering little in the way of guidance, investors are banking on stimulus that will soon be withdrawn.
As a stronger-than-expected reporting season draws to a close, companies are warning against expecting the same results going forward – something markets aren’t taking on board, according to SG Hiscock portfolio manager Hamish Tadgell.
“When we look at the data on earnings per share, it is still forecasting a recovery in 2021,” Mr Tadgell said.
“We think this is probably somewhat optimistic – after all, it historically takes, on average, three years for the market to return to its previous peak earnings level following a downturn. While we recognise this is an event-driven crisis rather than a structural or cyclical recession, and governments have injected massive stimulus, we would be surprised if things return to normal quickly given the economic challenges and dislocation.”
But while reporting season might not have provided much in the way of guidance, it did highlight the disparities between the companies that are thriving and those that are “doing it tough”.
“For active investors, there have been some good opportunities in those companies benefiting from the ‘stay at home’ trend, the stimulus packages and the [low-interest] rates,” Mr Tadgell said.
“These include electronics and furniture companies that can participate in the shift to [working from home and homeschooling], as well as food delivery and grocery companies. On the other hand, companies in the “out and about” category – such as travel and hospitality and retail shopping centres have been impacted by social distancing and isolation restrictions.”
Optimism about the recovery will also be tested over the coming months as the “[tug of war]” of “economic support versus economic reality” plays out to its bitter end, with plenty of questions still to be answered about the role stimulus will play in the aftermath of COVID-19.
“The massive government stimulus channelled through initiatives such as JobKeeper and JobSeeker, as well as loan and repayment holidays, is suppressing real unemployment and insolvency levels but, as the stimulus fades, it seems likely these levels will rise,” Mr Tadgell said.
“A key question is whether policy will outlast the pandemic. The economy is currently on life support but what will happen if this is withdrawn – and is it even feasible that it will be withdrawn?”
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