Plenty to Smile About
Investors have plenty to smile about as the reporting season winds down.
This week was the anniversary of the market turnaround from the worst destruction of shareholder wealth in living memory. In Australia we have seen our market up 55% on the ASX200 from its March lows. Overseas market turnarounds have been even more impressive with the Unites States seeing the S&P 500 up 70% and the NASDAQ up a staggering 75% while in the UK and Europe, markets are up around 60%. China has seen its market recover over 80% from its market lows.
The recent reporting season has given us pause for thought, with 7% of companies outperforming, 8% underperforming forecasts and the remaining 85% reporting inline (according to Credit Suisse). One key measure of corporate performance is the debt to equity ratio (D/E) and this has seen an impressive turnaround with the market average now 23% compared to over 30% in the previous corresponding period.
A raft of capital raisings to the tune of $100 billion in the past year has offered support to corporate balance sheets; however this has come at the cost of the dilution of shareholder equity. Earnings have fallen 13.7% due to this dilution (according to Macquarie). Corporates have been keen to hold on to cash, as evidenced by dividend payouts falling around 6% (according to JBWere) however this is a significant turnaround from the previous corresponding period where there were cuts to dividends of 22%.
It pays to be vigilant during the reporting season as traders can attest in the recent company performances. Those stocks that reported outperformance have in turn outperformed the share market benchmark by around 8.5% and on the flip side the underperformers have underperformed the index by 8.4%.
A quick synopsis of the results saw:
- Big four banks – upside surprise with the bad debt provisions falling more than expected, the sector is still a key driver for performance on the ASX.
- Insurers – were a mixed bag. Generally margins improved significantly, but Suncorps banking arm disappointed and QBE missed forecasts.
- Miners – profits were hit by a rising Aussie dollar and falling commodity prices over the reporting period. However the focus is still firmly on the strong Chinese and Indian demand which continues to underpin the outperformance of the materials sector in the ASX. Capital expenditure (Capex) will remain subdued for the remainder of the year, as miners still focus on cost cutting.
- Misses – those that disappointed saw their share price punished as was evidenced by: Gunns (GNS), Toll (TOL), Worley (WOR) and QBE.
What Now?
Brokers estimate in the 2010 forecast that earnings will rise for 6% and looking into the crystal ball, earnings are forecast to continue to rise in subsequent years, 27% in 2011 and 15% in 2012. If these forecasts hold true then they will underpin continuing recovery in the share market performance. 2010 dividend growth will lag earnings growth as corporates continue to place a high emphasis on the health of their balance sheet, this will impact those investors chasing yield.
Tempering these forecasts is the RBA’s determination to restore interest rates to normal (around 4.5% to 4.75%). This will mean that interest rates will no longer be benign and will start to actively drag on corporate EPS.
China is still outperforming world economies and so long as this continues our share market should continue to be in high demand.
Michael Hevern
Head of Research
