Tuesday, 28 February 2023

Martin Currie’s five key themes emerging during ASX reporting season as companies show resilience

by Berkeley Lovelace

  • Martin Currie reckons five themes influence company beats and misses during latest ASX reporting season
  • In a positive sign, no material evidence of interest rate induced recession yet in latest company reports
  • EPS over next 12 months expected to hold steady, but careful stock picking key for investors

As ASX reporting season comes to an end, asset manager Martin Currie reckons a series of themes for 2023 are emerging with company performances showing signs of resilience in the face of fears about inflation, rate hikes and a possible global recession.

Martin Currie chief investment officer Reece Birtles said the dominant five themes influencing company beats and misses include:

  1. Pricing power
  2. Cost pressures
  3. Leverage to interest rates
  4. Covid-19 reopening
  5. Resilient but softening consumer and business demand

“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,” 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.”

Martin Currie’s five key themes emerging during ASX reporting season as companies show resilience
Source: Martin Currie


Storm clouds brewing

And even if sales/revenue are strong, companies seem to be revising their margins downwards because of rising costs, leading to lower EPS guidance.

“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,”  Birtles said.

Source: Martin Currie


But storm not here yet

The RBA has risen interest rates nine times since May 2022, bringing the cash rate to 3.35% from 0.10% to curb rising inflation, which shot to a 33-year high in the last quarter to 7.8% YoY, or 1.9% QoQ.

But despite the economic uncertainty, Birtles said while clouds may be forming like a hot humid summer’s day, there’s still no lightning and thunder.

“In fact, the key theme of results overall is the lack of volatility across the board, despite how it may feel,” he said.

“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.”

Birtles 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 Covid reopening have been frequently cited as positives while cost pressures, the impact of increasing interest rates and ongoing labour shortages are consistent negatives,” he said.

Source: Martin Currie

Birtles said there has been surprisingly little mention of supply-chain pressures and the energy crisis although there have been pockets of concern over potential impact of government intervention.

“The cracks are more evident when looking across sectors with weaker first halves especially visible in energy and utilities feeding through to decreased market confidence in the second half outlook for earnings in these sectors.

“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,” he said.


Stock selection key for investors

Birtles said 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.

“This points to an environment where stock selection will continue to dictate the total return outcome for portfolios more so than has been the case over the last decade,” Birtles said.

To help with your stock selection, read about the five potholes ratings house Morningstar reckon investors should be careful to avoid in 2023.

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