Reporting Season Wrap & Outlook
This was a good reporting season with market EPS expectations increasing 1.6%, versus the usual average downgrade of -0.9%, the best outcome since 2010. Market EPS is now expected to grow 16% in FY17.
- This is almost all a result of the turnaround in resources, however the stabilization of earnings in industrials was also a better than usual outcome.
– Cost control was the key differentiator for industrial companies; results which demonstrated cost discipline to compensate for sluggish sales were generally well received.
– The market saw through lower quality results. Companies delivering poor cash flow or rising capital intensity tended to underperform.
- The season lacked particularly strong broad-based ‘themes’, however there were key observations:
1) Top 20 companies outperforming small caps
2) Companies surprising on capital return
3) Strategic responses by companies in disrupted industries showing signs of success
- Market performance was reasonably strong across the season but, ironically, resources underperformed despite earnings strength. Banks did well on earnings upgrades, while a fall in US bond yields saw rate sensitive equities do well.
- Looking forward, liquidity continues to support equity markets and valuations look reasonable, especially given the pick-up in earnings. Continued signs of improved global economic growth could see inflation pick up, which could support further rotation away from bond-sensitives and towards cyclicals within the market. Some companies are showing signs of a credible response to persistent disruptive threats. The upshot is that stock selection remains crucial.