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Lonsec   ⟩   News & Insights   ⟩   News   ⟩   How reporting season shaped the market
Danial Moradi

AuthorDanial Moradi

TitlePortfolio Manager

DateMarch 21, 2019

CategoryNews

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The Australian equity market reacted positively to the February reporting season, providing a relief rally after beating the market’s pessimistic expectations. But while results were not as weak as feared, it has generally been a tough environment for earnings, with more company downgrades than upgrades. In absolute terms, earnings expectations for FY19 have been tracking lower and overall market earnings are now expected to grow at around 4% in FY19, down from 7% in FY18.

Positive results for the Resources sector

Results from the Resources sector were the highlight, with earnings expected to grow by 13% in FY19, driven by ongoing strength in commodity prices and the strong balance sheets in the sector. The short-term outlook remains positive for the sector if spot prices remain around current levels, which could lead to material earnings upgrades for the likes of BHP and RIO over the next 12 months. This is in contrast to the Industrials and Financials sectors where earnings growth expectations remain in a downtrend, which is expected to continue through FY20.

Companies are still paying dividends

We saw a number of companies (including BHP, RIO, WES, WOW, FMG, CTX and MFG) lifting their dividend payout ratios and announcing special dividends or share buyback plans. This was driven in part by management looking to return excess capital and franking credits to shareholders ahead of potential policy changes following this year’s federal election.

Looking ahead at 2019

The ongoing slowdown in the housing market, policy uncertainty ahead of the federal election, and the outcome of the US-China trade negotiations remain the key headwinds for equity markets over 2019. These factors are increasingly reflected in outlook commentaries across our investment universe. In Lonsec’s view, the recent contraction in the growth rate of corporate profits will need to be reversed to justify current valuation levels, particularly given the momentum of the market rally to date during this calendar year.

How has earnings season affected Lonsec’s portfolios?

Looking specifically at the impact to our portfolios, the stocks in the Lonsec SMA—Core portfolio had a relatively strong reporting period in February, with CSL, CPU, WPL, QUB and REA delivering strong double-digit earnings growth. Meanwhile CBA, RHC, COL, and CGF reported broadly flat or negative earnings growth over the half. Looking ahead, earnings across the portfolio are expected to grow by around 5% over FY19, driven by the overweight position in Healthcare and underweight exposures to Financials and Materials.

This document has been prepared by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 Australian Financial Services Licence (AFSL 421 445) (Lonsec Research). LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN: 151 235 406. We can be contacted on 1300 826 395, by email to info@lonsec.com.au, or by writing to L7, 90 Collins Street, Melbourne, Victoria, 3000. You can also visit our website at www.lonsec.com.au.

This document has been prepared for the exclusive use by financial advisers, institutions and wholesale clients and is not intended for use by members of the public or retail customers and should not be relied upon by any other person.

This document contains general information only and does not take into account your individual objectives, taxation position, financial situation or needs. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. The views contained in this document are those of the author and are based on information known at the time of publication. That information may change. LIS assumes no obligation to update this document following publication. You should not rely on this document in making an investment decision about any security, but should make your own independent enquiries.

LIS is authorised under its AFSL to provide financial product advice, but is not authorised to issue financial products. Investors wishing to invest in Lonsec managed portfolios may only do so via another licensed product issuer. A Product Disclosure Statement (PDS) or Investor Directed Portfolios Services (IDPS) Guide is available from the relevant product issuer for any Lonsec portfolio referred to in this document. You should read the PDS or IDPS Guide and consider whether a product is appropriate for you before making a decision to invest. If you invest in a Lonsec portfolio, Lonsec may receive fees in relation to that investment. Investments in the portfolios managed by Lonsec are subject to investment risks including possible delays in repayment and loss of income and principal invested. Neither Lonsec Research, nor any other member of the Lonsec Group, guarantee the return of capital or the performance of any of the portfolios.

LIS has taken all due care in the preparation of this document. To the maximum extent permitted by law, Lonsec Group, its related bodies corporate, directors or employees make no representations or warranties as to the accuracy or completeness of this document including, without limitation, any forecasts and disclaim all liability for any loss or damage of any kind (whether foreseeable or not) that may arise from any person acting on any statements contained in this document. Past performance is not a reliable indicator of future performance. Future returns may be affected by a range of factors including economic and market influences.

Copyright of this document is owned by Lonsec. You may only reproduce, circulate and use this document (or any part of it) with the consent of Lonsec.

Want to find out more?

Get in touch to find out how we can help you start implementing managed portfolio solutions for your clients. Call us on 1300 826 395 or email info@lonsec.com.au.

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