August was an eventful month for investors. A US growth scare sparked an initial selloff, but markets quickly recovered as stronger economic data soothed recession concerns.
Most of Australia’s leading companies reported profit results in August and provided outlook guidance.
The profit season highlighted the disconnect between rising Australian share prices and softening earnings.
Aggregate ASX200 profits declined marginally for a second consecutive year amid subdued consumer spending, higher costs and weaker commodity prices. Against this backdrop, the ASX200’s +15% return over the past 12 months seems misplaced.
Individual company results and share price reactions were mixed, as shown in the table below.
The message on consumer spending was soft, with sales generally down. Well-known retail names including JB HiFi, Woolworths and Coles, have navigated this period well, managing cost pressures across their businesses.
Companies including AGL Energy, Origin Energy, Telstra and Transurban noted higher demand for hardship support due to cost-of-living pressures.
Higher listings at CAR Group (owner of CarSales) and REA Group (owner of realestate.com.au) are another sign of consumer stress, indicating a level of forced sales.
Seek described a weakening jobs market as more people seek work despite fewer job ads.
Various industrial and building materials companies noted subdued conditions in the housing sector. James Hardie reported a reduction in Asia Pacific Fiber Cement volumes driven by “weak demand in Australia”. Plumbing supplier Reece noted it is enduring a “softening housing market” that is “expected to remain soft”. Wesfarmers added that Bunnings sales have moderated in the first six weeks of the new financial year due to “continued market
-wide softening in building activity”.
Big bank results were respectable and generally well-received by the market as net interest margins stabilised. CBA reported that 90-day mortgage arrears had risen in line with historical averages. NAB noted “higher arrears for the Australian mortgage portfolio” and said business borrowers also feel stressed with “a continued broad-based deterioration in the Business & Private Banking business lending portfolio”.
Rising debt costs hit rail freight operator Aurizon and property groups Dexus and GPT as Australian interest rates remain higher-for-longer. Aurizon’s interest on drawn debt increased to 6.2% from 4.1% a year earlier.
Overall earnings guidance was cautious, leading analysts to trim their 2024-25 ASX200 earnings growth expectations to 3% (from 5%). This compares to about 17% forecast earnings growth for the US S&P500 Index.
The materials and financials sectors are most important for Australian investors, comprising about half of the market’s value.
Iron ore prices are the biggest driver of materials sector profits. They can be unpredictable, but they are expected to weaken further due to softer Chinese demand and increasing global supply. BHP’s recent results deck shows that a US$10/t change in the iron ore price impacts underlying earnings by about 8%, which is highly significant.
Australia’s major banks are an excellent example of where subdued profit growth hasn’t stopped share prices from rallying. CBA is the world’s most expensive listed bank, trading on about 23 times earnings compared to the global peer average of about 12 times.
The bears believe that elevated Australian valuations and limited growth prospects leave the equity market vulnerable to a change in sentiment.
The bulls point to the recent V-shaped recovery as evidence that the overall market trend remains bullish. Indeed, investors are still buying the dip rather than selling the rallies. The bulls hope for an upside surprise from commodity prices or sooner-than-expected interest rate relief to reignite earnings growth.
Regardless of who is correct, we believe Australian equities remain important diversifiers and sources of income for multi-asset portfolios.
The volatility spike was short-lived.
What’s making investors nervous?
Weak US economic data/recession fears.
Elevated US technology stock valuations.
The Yen carry trade.
ASSET CLASS PERFORMANCE
Australian Equities
International Equities
Property and Infrastructure
Fixed Income
As always if you require more information please don’ hesitate to contact me.
Philip Connor-Stead AFP® Adv. Dip. FP
Principal
New Horizon Wealth
Authorised Representatives of Lifespan Financial Planning Pty Ltd ANB 23 065 921 735 AFSL 229892
Disclaimer
New Horizon Wealth Pty Ltd (ABN 54632726222) is a corporate Authorised rep of Lifespan Financial Planning PTY LTD (ABN 2306921735 AFSL 228992 . New Horizon Wealth and its directors, officers, authorised representatives and agents believe the information contained in this document is correct and that any estimates, opinions or recommendations in this document are reasonably held at the time of compilation, but may change without notice. No guarantee or warranty is given, or representation made, as to accuracy or completeness. Past investment or trading performance is not a reliable indicator of future performance. To the extent permitted by law, New Horizon Wealth disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything in or omitted from this document. Advice included in this document is general advice, based solely on consideration of the investment or trading merits of the financial product(s) alone without taking into account the investment objectives, financial situation and particular needs (i.e. financial circumstances) of any particular person. Before making an investment or trading decision based on the advice, the recipient should carefully consider the appropriateness of the advice in light of his or her financial circumstances.
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