In the investment bank’s reporting season preview, UBS strategists David Cassidy and Dean Dusanic said the bleak earnings picture is being driven by distinct sectors, namely, resources and the banks.
“In contrast to negative overall (weighted) market EPS growth, the typical (median) stock looks like recording around 3 per cent EPS growth in the 2015-16 financial year (5 per cent ex-resources),” said the report.
EPS growth expectations for the median stock in the 2016-17 financial year are currently around 7 per cent, said UBS. The investment bank expects earnings to return to positive territory next year.
“The bank sector remains a drag on earnings growth, as does the consumer staples sector,” UBS said. “Both are dragging on the large-cap end of the market (the 20 leaders).
“Investors will be looking for any signs of improved, or at least stabilising, momentum in both of these heavyweight sectors. We continue to see downside earning risks in the consumer staples sector in particular.”
Banks are looking more conservatively priced in comparison with the industrial sector, but concerns continue to focus on the EPS growth outlook – or lack thereof, said UBS.
“We expect the market to be watching for evidence of bad and doubtful trends after the last [bank] reporting season uptick in provisions. The market will also be watching net interest margin trends closely as well as dividend policy,” the report said.
The Commonwealth Bank is the only member of the big four to report a full result (on 10 August).
“We expect the Commonwealth Bank result to be marked by good volume growth, weak fee income, some moderate margin pressure, some moderate rise in bad debt provisions and a flattish dividend,” said UBS.
Overall, the lead-up to the coming reporting season has been “benign”, with profit warnings “relatively scarce”.
“[However, this] reporting season’s key risk may be more in the level of prevailing valuations for many stocks than earnings risk per se,” said UBS.
“The market’s recent broad-based run has pushed up valuations and thus the onus on delivery in the upcoming reporting season. The Industrials ex Financials sector now sits at just over 19x forward EPS (with many stocks well north of 20x forward).”
Valuations are not allowing much room for error, said UBS.
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