FNArena’s Weekly Insights – February 8 2021

Weekly Insights this week will be published in two parts because FNArena is organising a webinar on Monday evening (see further below).

In this Part One:

-February Is Feeding Market Optimism
-Conviction Calls
-FNArena Webinar (tonight)

By Rudi Filapek-Vandyck, Editor FNArena

February Is Feeding Market Optimism

As the February reporting season in Australia is slowly warming up, investors are anticipating stronger-than-expected profit results, leading to increased market forecasts, opening the gates to higher valuations and less downside risks.

At face value, they do have a few strong indicators on their side, including:

-quarterly corporate results in the US where circa 80% of all companies manages to beat market forecasts;
-historic precedents, including 2009, showing analysts are too conservative when the big economic turnaround arrives;
-Australian corporate results post-August last year (Sep-Dec) saw 49% beating expectations versus a long-term average of circa 33% (*)

Other factors to consider include ongoing policy support from major central banks and governments, including a fresh stimulus package by the Biden administration in the US; further progress in rolling out vaccinations; and robust consumer spending as many households are left with spare cash and limited avenues to spend.

These are all positives and probably explain why equity markets have seldom paused to take a breather over the past four months. Earnings forecasts are on the rise and companies are expected to not only justify those increases, but add more reasons for further upward adjustments.

REA Shows The Way

The case for ongoing optimism was once again highlighted by local leading property portal REA Group ((REA)) on Friday. While the financial result has triggered further upgrades to analysts’ forecasts, and to valuations and price targets, everyone can see from Stock Analysis the share price had already well and truly anticipated this would be the case.

This, however, has not stopped REA shares to continue rising post Friday’s release. Today, as I am writing these sentences, the shares are up a further 3.5% highlighting the one question that has at least part of the investment community nervous: are markets not expressing too much optimism and at what point will the music stop playing?

For the time being, such secondary considerations are being dismissed and it is very likely that ongoing positive corporate results and updates will continue to feed in ongoing market optimism.

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