Economics & Markets

Pullback ahead as we navigate another tricky reporting season?

By Dermot Ryan
Sydney, Australia

With the Aussie equity market roaring ahead, now up over 30% in just over a year, on hopes of stimulus induced growth we wonder whether our market is due a breather. As we move into February, we will see results for the first six months of this financial year – so far, it’s looking like the market momentum could be tested.

In our view, it’s looking to be another lacklustre performance for profits at an aggregate level. We expect investors will turn to outlook statements looking for green shoots in the period ahead and should companies not be able to provide strong profit outlooks then valuations will moderate.

Similar to what we experienced in August last year, we’re seeing the domestic economy has got a number of legs of stimulus coming through from cash rate cuts, a lower Australian dollar and some fiscal spending. There are also some repairs around the bushfires that are taking place and will continue. All of these triggers can pave the way to increased revenue and profitability for companies listed on the Australian stock market.

In addition, valuations are very high – we’ve seen a big rally upwards of 30 per cent from the bottom of December 2018. In our view, sentiment has probably gone too far on stocks as profits have gone backwards over that period and outside of east coast house prices, there are not enough signs to justify such a massive rally.

From a market point of view, we believe conditions are right for a pullback. Whether that’s going to happen this reporting season is still up for debate. The market has been forgiving of late, and we’ve seen a number of large profit downgrades go unpunished. The market has not sold off the stocks too badly in the hopes profits move higher in the coming years but if more evidence comes to dent these hopes then a correction will follow.

The real test has been whether there is still moment in the market to push us through, and how comfortable companies feel adjusting their guidance statements, or providing guidance for higher profits as we move later into the year. One thing is for sure, we are unlikely to have as smooth sailing as last year as we enter this new decade.

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Dermot Ryan, Co-Portfolio Manager (Income)
  • Economics & Markets
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