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Five Things to Watch This Earnings Season in Australia

Tim Smith and Jackie Edwards
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Five Things to Watch This Earnings Season in Australia

(Bloomberg) -- While global threats hang over an Australian reporting season scheduled to kick off later this week, some market watchers warn it will be domestically exposed firms that may be most at risk.

Australia’s benchmark index has surged about 20% this year on a dovish central bank, a surprise incumbent government election win and higher commodity prices. But with the local economy expanding at its slowest pace in a decade in the first three months of the year, that momentum may be hard to keep up.

Those with a domestic focus may see their earnings “under more pressure than people think,” said Randal Jenneke, head of Australian equities at T. Rowe Price said. More broadly, “we’re waiting to get a sense from companies on the impact of trade and tariff tensions” along with global growth targets and potential Iranian developments.

Here’s five things to keep an eye on this month:

Sectors Driving Expectation

Analysts are split on where Australian stocks will go after this year’s rally.

Citigroup Inc. expects central-bank dovishness to lift the benchmark to a record high next year as investors seek income from equities as bond yields and deposit rates quickly approach zero.

The nation’s historic ability to weather global downturns also has Morgan Stanley Wealth Management feeling positive. Company earnings are expected to rise by about 10% in the next 12 months, according to data compiled by Bloomberg.

Still, high valuations are prompting others to look at the market in a different light. Goldman Sachs Group Inc. last month downgraded Australia to underweight partly because of how pricey it’s become.

Key sectors to watch: Industrials, financials, healthcare

Confession Season Crosshairs

The number of stocks that have had large single-day moves in the lead-up to earnings, the so-called confession season, has increased substantially in 2019 compared with a year earlier. Some analysts say this is cause for pause on growth stocks in particular.

“We see a strong chance of FY19 results beating low expectations, but market estimates for FY20 look too heroic,” Morgans analysts Andrew Tang and Tom Sartor wrote in a July 22 note.

In the lead up to reporting season investors have been quick to pull the trigger in an environment where the benchmark index has come close to record highs, but is also expected to fall by about 4% over the next 12 months, according to analyst estimates compiled by Bloomberg.

“Be vigilant with high growth stocks in this context,” Morgans write.

Key stocks to watch: Nanosonics, Bellamy’s, NextDC, Carsales

Yield Hunters

With a low interest rate environment likely to extend into the second half of 2020 amid a slowing domestic economy and weaker global outlook, A-REIT yields are looking more attractive. However, even within the sector, there are winners and losers.

Those that focus on office and funds management have vastly outperformed the ones that target the retail sector, with Charter Hall, Mirvac and Goodman surging, while Scentre Group and Vicinty Centres struggle.

The ASX 200 Real Estate Index has risen 24% in 2019, moving almost in lock-step with the benchmark index. The central bank reduced interest rates in June and July to a record low of 1%, with traders expecting another cut in the next three months.

Key stocks to watch: Charter Hall Group, Goodman Group, Vicinity Centres, Scentre Group

Commodity Commotion

The materials sector accounts for about 20% of the benchmark and is set to provide a welcome boost to earnings amid a broad-based rally in commodity prices. Gold prices ended the first half of 2019 at a near-six year high, while iron ore soared more than 60% to the highest since 2014.

BHP Group Ltd. may pay a special dividend at its August results as net debt is expected to be below its target of $10 billion to $15 billion, while Rio Tinto Ltd. and Fortescue Metals Group Ltd. are also expected to benefit from the surge in prices, which raise the prospect of more volatile earnings in the future.

“The sector more broadly is now in a position whereby organic profit drivers are almost exhausted, while the free ride of higher prices takes over,” RBC Capital Markets analysts led by Paul Hissey wrote in a July 21 note. “While the impact on cash flow and earnings is arguably the same, that which creates the greatest influence (price) is also the least controllable.”

Investors will also be looking for commentary on how the big thematic issues will influence prices in the second half of 2019 including ongoing trade tensions between the U.S. and China, expectations for further global interest rate cuts and the potential for Iran’s actions in the Strait of Hormuz to create another diplomatic friction point.

Key stocks to watch: BHP Group, Rio Tinto, Fortescue

Election Elation

The big question for financial stocks is whether they can maintain the gains clocked after the surprise victory of the incumbent Australian center-right coalition at the federal election in May.

“Commonwealth Bank of Australia’s earnings may come under more pressure in the year starting July, as the impact of cash-rate cuts and conduct bills should linger,” Bloomberg Intelligence Analyst Francis Chan wrote in a July 22 note.

AMP Ltd. was earlier this month forced to abandon plans for an asset sale that was expected to help fund its turnaround strategy, while the Commonwealth Bank of Australia, the only major bank to report in August, is likely to face pressure on margins from lower rates, as well as the prospect of remediation costs tied to a government inquiry into the industry.

However it might not all go one way. Examining Challenger, Australia’s largest annuity provider, Bloomberg Intelligence analyst Sharnie Wong said the regulatory reform should lift sales in the long term.

The finance sector, which is the single largest grouping on the ASX 200, has advanced 11% since the election as investors breathed a sigh of relief that the opposition Labor Party wouldn’t be able to wind back tax breaks for property investors and equities investors. The bank sub-index, which mostly comprises the so-called big 4, has risen nearly 13% over the same period, almost twice the benchmark’s 6.7% gain.

Also under the post-election microscope is the healthcare stocks, the top performing segment since Morrison’s victory in May.

This optimism is seen flowing into profits, with health stocks poised to post the largest earnings growth over the next 12 months among the benchmark index’s 11 sectors, according to data compiled by Bloomberg.

Stocks to watch: Medibank Private Ltd., NIB Holdings Ltd., Commonwealth Bank, AMP

To contact the reporters on this story: Tim Smith in Sydney at tsmith58@bloomberg.net;Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Rebecca Jones

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