The Franklin Templeton subsidiary said that despite fears about inflation, rate rises, and recession, Australian companies have performed well, with some clear trends beginning to emerge.
The chief investment officer at Martin Currie, Reece Birtles, identified the key factors influencing company performance this season as pricing power, cost pressures, leverage to interest rates, COVID reopening, and consumer and business demand that, while resilient, is gradually softening.
“Broad market earnings growth expectations have been trimmed to zero for the year ahead, emphasising the importance of focusing on resilience of earnings in a slowing economy and wide valuation dispersions across stocks,” Mr Birtles said.
“There has been an overwhelming number of sales/revenue results in line with consensus expectations with an even balance of earnings/dividend surprises, and disappointments.
“Similarly with respect to guidance revisions, a generally benign outlook for sales/revenue offset by worsening costs indicative of the inflationary environment has led to a marginally negative skew for EPS guidance feeding through to strong resilience in dividend expectations.”
Mr Birtles added that the absence of volatility has emerged as a prominent theme, despite the fact that it may not have been evident.
“We have been looking for material evidence of the interest rate induced recession; however, the numbers simply don’t show that yet, notwithstanding management commentary pointing to some clouds on the horizon,” he said.
“The top issues cited by companies, in both results and guidance outlooks, are pricing strength and consumer/business demand. Management change and the benefits of post-COVID reopening have been frequently cited as positives while cost pressures, the impact of increasing interest rates, and ongoing labour shortages are consistent negatives”.
Mr Birtles noted that there has been surprisingly little mention of supply-chain pressures and the energy crisis, although there have been pockets of concern over the potential impact of government intervention.
He did, however, note that certain sectors, such as energy and utilities, are exhibiting weakness, with lacklustre performance in the first half resulting in low market confidence in the second half earnings outlook for these segments.
“Lower quality stocks have also borne the brunt of negative earnings revisions, although an increasing number of mid-strength quality companies have generated negative EPS outlooks indicating a tougher profit cycle for some on the horizon,” said Mr Birtles.
“From a total market perspective, consensus EPS over the next 12 months is expected to hold steady, reflecting robust sales and revenue expectations but offset by increasing cost pressures,” he noted, adding that this suggests that the stock selection process will play a more significant role in determining the total return outcome for portfolios.
