FNArena’s Weekly Insights – October 11 2021
In this week’s Weekly Insights:
-Forecasts Are Falling
-Conviction Calls
-Research To Download
By Rudi Filapek-Vandyck, Editor FNArena
Forecasts Are Falling
As if investors didn’t already have enough to worry about, earnings forecasts around the globe are now in a negative trend, as in: forecasts for corporate profits are falling, but they are still positive and likely to remain positive for the year ahead.
But falling forecasts in combination with fragile investor sentiment because there are so many other factors to be concerned about, while average valuations are still perceived as high, even after weeks of volatility and weakness, is not an ideal combination for equity markets, to say the least.
Not helping matters is growing awareness that companies are still being affected by lockdowns and hesitant consumers, as well as by the rising price of oil and other input costs.
In the USA, another quarterly reporting season is about to commence and both analysts and investors will be keen to find out whether expectations need to be lowered. In Australia, the results post-August have been rather weak, but then we are to date still only talking about 12 stocks and the banks are yet to report their interim financials.
Bank of Queensland ((BOQ)) is scheduled to kick off the seasonal local bank reporting season on Wednesday (October 13) and nobody is anticipating a shocker of an announcement. The likes of Unibail-Rodamco-Westfield ((URW)), ResMed ((RMD)), Janus Henderson ((JHG)) and Macquarie Bank ((MQG)), plus three of the Big Four banks in Australia will follow suit over the coming month.
FNArena’s Corporate Results Monitor will be keeping track of the finer details: https://www.fnarena.com/index.php/reporting_season/
But more than the three dozen or so local companies that will soon be revealing their financial performance over the past six months, this year investors’ attention shall be primed towards the flood in AGMs that are scheduled for November. Who will be brave enough to quantify the outlook for the six or twelve months ahead?
More importantly: are companies preparing to downsize expectations?
Those worried about a potential gap opening up between market forecasts and what companies can reasonably achieve in light of deteriorating momentum, ongoing supply challenges, labour constraints and rising input costs worry there might be more negative adjustments ahead, which might well create the trigger for more weakness in equities.
As per always, the proof will be in the statements delivered to shareholders over the weeks ahead, be it with the release of interim or quarterly financials, be it in front of anxious shareholders at the annual corporate gathering.
Quant analysts at Macquarie believe investors should expect a positive catalyst from the likes of Aurizon Holdings ((AZJ)), Charter Hall ((CHC)), Coles ((COL)), Cleanaway Waste Management ((CWY)), Mineral Resources ((MIN)), and Seek ((SEK)) among the Top100 companies on the ASX.
Outside the Top100, these analysts expect positive updates from Australian Finance Group ((AFG)), City Chic Collective ((CCX)), Codan ((CDA)), Charter Hall Retail REIT ((CQR)), Elders ((ELD)), Healius ((HLS)), Imdex ((IMD)), Karoon Energy ((KAR)), Liberty Financial Group ((LFG)), Monash IVF Group ((MVF)), Premier Investments ((PMV)), Resimac Group ((RMC)), Shopping Centres Australasia ((SCP)), Steadfast Group ((SDF)), Seven West Media ((SWM)), Southern Cross Media ((SXL)), and Universal Store Holdings ((UNI)).
That list contains exposure to the local housing market, alongside traditional media laggards, a number of specialised retailers, and landlords, plus some cyclicals. Summary: ‘value’ stocks rather than quality or growth.
Worries, in a general sense, are concentrated around companies that have performed well to date, but are facing lockdown-impact or a change in consumer spending, including companies such as Carsales ((CAR)) and Baby Bunting ((BBN)), as well as Bapcor ((BAP)), JB Hi-Fi ((JBH)), and Corporate Credit ((CCP)).
As per always: we will have to find out who or what exactly. Meanwhile, investors’ nerves will be tested by the price of oil and gas remaining in a persistent up-trend.
Two weeks ago, I wrote the following concluding sentences to Weekly Insights dated 30th September 2021:
“Combining all of the above, I think it is more than likely some hard questions will be asked from financial markets in the months ahead and only a brave man, or a fool, would pretend to know what all the responses will be.
Previously, I have written that having some cash on the sideline, for comfort, but also to jump on opportunities that might open up, seems but appropriate for investors with only a moderate appetite for risk and, let’s call it that, “adventure”.
I think that statement remains valid, without getting too bearish or panicky about what can possibly lay ahead.”
