By Matthew Sherwood, Head of Investment Market Research,
Perpetual
This week’s economic data in Australia has confirmed
what Australia’s company reporting season has been telling us; there is
only modest growth momentum in both the economy and earnings at present. There
were low expectations heading into the February 2012 reporting season, but
large cap stocks had difficulty clearing even these hurdles, whereas small
cap stocks (particularly mining services and consumer discretionary) did much
better. Companies exposed to resource volumes and the Capex cycle did
reasonably well, whereas the remainder struggled in the wake of soft revenue
growth, sticky cost pressures and the high Australian dollar, which culminated
in margin pressures being the prominent theme.
The number of positive earnings surprises (64) was similar
to the number of negative surprises (62), and overall FY12 earnings per
share growth declined to around 2%. However, the downgrades-to-upgrades ratio
bottomed (from 0.3x in mid-January 2012) and is now starting to recover (0.8x
in late February), which indicates that almost as many stocks are being
upgraded as downgraded. This is the best result for a year. Although earnings
growth was modest during the season and there was little in the way of capital
management (only Westfield and Telecom New Zealand announced notable buybacks
plans), the market experienced some very positive price reaction to their
respective results. Clearly the market was priced for bad news on many
fronts and stock prices rose when the results were a bit better.
Consequently, two smaller themes have become prominent in
the prevailing market environment. The first is ‘value’, which allows oversold
companies to experience price growth even though the macroeconomic
environment may not improve. The second is ‘quality’, with firms that
have a good earnings profile, strong balance sheets and that can provide
income growth, being highly prized by investors.