What we’ve learned from reporting season

The results season is done and dusted. So what have we learned this time out?

There are a few themes that stand out. 

• It is not as bad out there as some would have us think. The banks updated the market including a strong CBA result and dividend, and although put more money aside for a rainy day, there seems to be only a light shower in terms of that mortgage stress that we have been told is going to cripple the local economy. We know too, from the banks, that it is very competitive out there for the mortgage market. Everyone has had their NIMs squeezed. Balance sheets are strong and buybacks are back in. Why do we see buybacks rather than dividends from some? Simply buybacks offer more flexibility for the company. Once you have paid that dividend, it's gone. A buyback can be suspended or cancelled if an opportunity comes along. Whitehaven Coal (WHC) has adopted this policy as the BHP coal assets may come into play. What we also found out from the Big Four is that there is a reason they are big. When times get tough, they pick up business. The smaller players suffer. Judo Bank (JDO) was a casualty here as the big boys fought, Prospa (PGL) also saw a similar problem as the SME sector seemed to be running into trouble. 90-Day plus delinquencies jumped from 1.9% last year to 3.4% this year. Could be a slight concern. 

• Inflation may be easing in the economy, but seems that labour costs and other inflationary pressure from mining to tech are still elevated. Miners have seen big increases in capex. Delays too. Inflation has been a convenient cover for companies to raise prices. And they have stuck. Some by virtue of no alternatives like QANTAS (QAN) and Boral (BLD), but there have been many companies that have justified price increases as inflation is the default excuse. Of course, that does stoke inflation in true Catch-22 style, but although sales have slipped slightly, revenue has bounced. Good news for companies. Monthly inflation CPI came in at 4.9%. A good beat. Positive for the markets.
• Corporate Australia is in a pretty good place. Balance sheets are strong and even the highly geared REITs have held firm. The revaluations have not been as negative as some thought but the lack of deals in the property sector may be hiding some problems. Dividends have been robust.
  

• The rumours of the death of retail have been greatly exaggerated. What has become apparent is that retailers are all different. Some have shot the lights out. Cettire (CTT) showed us that luxury is still in demand. City Chic (CCX) is at the other end of the retail scale and has been hit hard. The ASX Consumer Discretionary sector is trading at multi-month highs. Some people are still spending. It is not all doom and gloom. Nick Scali (NCK) was a good pointer to that. Good solid results.
  

• Healthcare is underperforming. The so-called defensive qualities of healthcare are under scrutiny. Costs are rising. We have an aging population and a requirement for many more carers and services. These cost money, and the pandemic bounce has worn off for some. CSL had an almost unheard-of downgrade before the results and calmed the market somewhat, but blue chip Resmed (RMD) has suffered from margin compressions and FX woes. Another part of the results season.

• What has been extraordinary has been the volatility. The market seems to be hypersensitive. Knee jerk reactions, lower volumes and the computer trading programs firing electrons around the ASX and smashing stocks on results only to see a bounce after the analysts have weighed in the following day. Volumes have been huge in some stocks whilst others have seen serious liquidity issues. The shorts have come out to play in many stocks including Pilbara Minerals (PLS) after a rise in capex to get to increased production. Yet against this backdrop, the actual ASX 200 has drifted lower. Down 1.8%. August has been a bad month in the US markets (similar falls there to the ASX), as Jackson Hole held our attention and the summer silly season continued overseas. Bond yields went nuts as bond markets sold off only to reverse on signs the US economy is cooling. The question has now moved from how high to how long will rates remain elevated.
• There has been a lack of guidance for many. Those that did guide higher were rewarded in spades. Lower guidance was punished.

Slightly worrying for central banks, is that for all the bluster on rates and how high they need to go, the underlying economy is holding up well. The corporate sector is holding up well, markets are holding up. Huge rises in rates yet have had not much effect. It must be galling. But I guess that is the soft landing we were hoping for. It does seem to be happening. Maybe Powell can do his ‘Mission Accomplished’ speech sometime soon? 

As we head into the historically worse month of the year for markets, the coast is starting to clear, the mist is burning off. The RBA meeting should see Phil Lowe leave rates unchanged. The Fed should pause, earnings were solid and that leaves some scope to run into the next quarter. AI will still be the theme to drop if you want attention. It may well be that we are entering the Goldilocks zone. Clear air and the bulls will fill the void. 

And if China can find the Bazooka, even a small one, our resource sector could banish the three bears and leave just the middle bowl not too hot, not too cold, just right. 

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