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Inflation Threatens to Upend Australia’s Earnings Season

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(Bloomberg) -- Consumer spending, demand uncertainty for miners and labor challenges are front and center as Australia’s earnings season ramps up this month.

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Investors will be looking to see how Australia’s biggest companies are weathering tough global macro conditions after the country’s benchmark S&P/ASX 200 Index fell 6.3% this year, though still holding up better than the regional stock gauge.

Traders face a mixed reporting season as rising interest rates and inflation pressures threaten to weaken corporate profits despite buoyant domestic economic conditions. The world’s No. 2 miner, Rio Tinto Group, kicked off the season last week by posting a sharp profit decline and halving its dividend, signaling pain ahead for one of the nation’s key sectors.

“Considerable doubt hangs over the path of earnings” amid worries over geopolitics and recession risks, JPMorgan Chase & Co. analysts led by Jason Steed wrote in a note. “While Australia has fared better than most markets in the year to date, concerns are building as inflation climbs and conditions in the China property market deteriorate.”

Here’s what to watch this earnings season:

Rate Hikes and Spending Habits

The Reserve Bank of Australia has rapidly tightened policy, having raised interest rates by 175 basis points since May, as it joins central banks around the world in trying to prevent consumer prices from spiraling out of control.

Company earnings may shed light on how rate hikes are impacting shoppers as Australian retail sales show signs of cooling. Any changes in consumer spending after the RBA’s moves will be closely tracked, Morgan Stanley analysts led by Chris Nicol wrote in a note.

The rate increases might aid Australian bank’s net interest margins, the broker added. Whether that benefit can boost lenders’ share prices “will set a broader tone for the market,” according to Morgan Stanley. Commonwealth Bank of Australia, Australia’s largest lender, reports next week.

Key stocks to watch: Woolworths Group Ltd. (YTD +0.2%), Commonwealth Bank (YTD -0.5%), Harvey Norman Holdings Ltd. (YTD -16%), JB Hi-Fi Ltd. (YTD -11%), Qantas Airways Ltd. (YTD -8.2%)

Resource Reprieve?

As a lifeline to the Australian economy, the resources sector will be in focus amid sliding iron ore prices, China’s property crisis and increasing cost pressures.

Citigroup Inc. expects a pandemic-fueled materials boom to continue in the near term and boost mining earnings, analysts led by Liz Dinh wrote in a note. Still, JPMorgan downgraded materials to neutral from overweight in its model portfolio due to ongoing macro concerns and an uncertain dividend outlook for miners, the broker said in a note.

Key stocks to watch: BHP Group Ltd. (YTD 4.5%), Fortescue Metals Group Ltd. (YTD -6.2%), Champion Iron Ltd. (YTD -16%), Woodside Energy Group (YTD +48%)

Labor Challenges

Commentary on labor problems will be closely watched after companies from miners to airlines have bemoaned staffing gaps.

BHP Group and Rio Tinto have both cited labor shortages as a drag on production. Australia’s national carrier Qantas has also faced backlash after canceling or delaying services due to lack of workers.

“Last results season saw management teams cite the particular difficulties in finding skilled trade professionals,” UBS Group AG analysts including Richard Schellbach wrote in a note. “Companies operating in financial services and technology fields will also provide comments on the challenges they are facing in filling positions in more white collar fields.”

Key stocks to watch: BHP, Fortescue, Woolworths, Qantas, Bega Cheese Ltd. (YTD -38%), Suncorp Group Ltd. (YTD +3.8%)

Dividend Watch

Among companies on Australia’s benchmark, those reporting in August are set to pay out about A$15.29 billion ($10.6 billion) in dividends, a 26% increase from the same period last year, according to data compiled by Bloomberg.

Energy shares are expected to lead payment growth in 2022 thanks to soaring commodity prices. Consumer discretionary firms are tipped for the largest decline after some companies in the sector omitted payouts earlier this year.

Miners will also be in the spotlight after Rio slashed its dividend. Still, Citi’s Dinh expects strong cash flows and under-geared balance sheets to allow large miners to deliver high shareholder payouts, according to a note.

The rebound in international tourism may provide scope for travel firms like Qantas Airways Ltd. to reinstate dividends.

Key stocks to watch: BHP, Commonwealth Bank, Newcrest Mining Ltd. (YTD -22%), Qantas, Whitehaven Coal Ltd. (YTD +146%), Ampol (YTD +15%), Kogan (YTD -52%)

(Updates with additional data, chart in dividend section)

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