With earnings season downgrades coming thick and fast, Australian fund managers are seeking the relative safety of resources and banking stocks, says Bennelong.
Speaking in Sydney yesterday, Bennelong Australian Equity Partners investment director Julian Beaumont said the weak AGM season prior to Christmas is translating to soft corporate earnings.
While aggregate earnings are expected to be around the 17 per cent mark for 2016-17, once the resources sector is stripped out, the non-industrial sector is “up against it”, Mr Beaumont said.
Yesterday saw ratings downgrades from GBST and OFX Group (formerly OzForex), with the share prices of the two companies down 18 per cent and 21 per cent by mid-afternoon, respectively.
Brambles posted a profit warning on 22 January, promoting a 17 per cent slump in its share price, while CSL beat market expectations on the upside.
But for Australian equities managers, the priority throughout earnings season will be to avoid similar “blow-ups” as opposed to picking the earnings surprises, Mr Beaumont said.
“You’ve seen a number of downgrades already, and it really points to a situation where there’s likely to be more of those,” he said.
“There’s a couple of safe places to be over earnings season and one suspects that a number of fund managers will be placed there – particularly in the banks and to a lesser extent more generally in the resource stocks,” Mr Beaumont said.
The relative “safety” of resources stocks throughout the earnings period is down to the fact that commodities prices, not earnings results, tend to be the main driver of their share prices, he said.
Overall, the Australian equities market will become less directed by ‘macro’ factors and more stock-specific throughout February, Mr Beaumont said.
“The market has taken its direction from US [so far in 2017]. That’s going to change around as reporting season comes though as the earnings misses and beats plays out,” he said.