Investors craving good news were left hungry as the Australian earnings season wound down without replicating the generally good economic conditions.

More than 70 percent of companies reported higher profits than in the previous year, but this growth was only a modest five to six percent excluding the 130 percent bounce in profits from resources companies, and half that again if banking stocks were excluded. More significant, was the lack of guidance going forward, says AMP Capital Senior Economist Diana Mousina.

“The disappointment has been in a lack of outlook guidance across the market,” Diana Mousina told a recent Capital Insights Forum. “Profit growth isn’t expected to be as buoyant as had been indicated by the very strong business confidence numbers.”

Recent business conditions data from National Australia Bank showed a one-point rise in July to the highest level since early 2008, while business confidence also jumped during July, to a rate double its historic average.

Such data often coincides with earnings upgrades, but did not this season, according to AMP Capital Senior Portfolio Manager Phillip Hudak.

“Both small caps and large caps have delivered underwhelming profit results this reporting season, with downward earnings revisions outweighing upward revisions across the stocks which have been above long-term trends,” says Hudak. “More concerning is the downgrade earnings revisions to next year’s forecasts which is also above long-term trend.”

“Small caps outperformed their large cap counterparts, due largely to avoiding many of the headwinds facing large caps, notably in the Banks, Insurance, and Telecommunication sectors,” he noted.

With the earnings season almost done AMP Capital Portfolio Manager Dermot Ryan pointed to rising costs from factors such as electricity – which impacts both on company expenditure and consumer spending – as another weight on market forecasts.

 “On a headline basis, we are seeing revenue increases in sectors like resources and utilities due mainly to commodity price rises; but a difficult environment for domestic and in particular consumer facing businesses,” Ryan says.

“Many companies have already moved to address their controllable costs over the past few years so we are really starting to see a divide in abilities of companies to grow their earnings. As a result, we are seeing companies profit guidance being for a more modest growth ahead, sometimes at lower margins and this in turn see less upgrades from analysts in the market,” Ryan added.

The real estate industry could provide some reprieve, at least in the short term. with the latest Australian Bureau of Statistics data showed building approvals and construction data sharply higher than expected.

“Unlisted commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield, but this will wane eventually as bond yields trend higher,” says Mousina.

There are clouds on the horizon here too though. “National residential property price gains are expected to slow, as the heat comes out of Sydney and Melbourne, and cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5 percent.”

What this contrast between the data and underlying company earnings means is that its unlikely the Reserve Bank of Australia will raise interest rates in the short term, according to Mousina.

Investors are also watching the escalating tensions between North Korea and the US, as well as general concerns about US President Donald Trump and the need for the US government to raise the debt ceiling by mid-October, as risk factors for stocks and bonds.
 

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