From Amazon to ore, ‘reporting season’ a broader tale

From Amazon’s much-hyped entrance into Australia to more typical concerns like the outlook for commodity prices, the so-called reporting season is set to dominate investor airwaves for the next month.

Unlike June 30 “tax time”, the stockmarket has two main reporting periods each year, in February and August, when most companies release results (three of the major banks, including Westpac, however have September 30 financial years, different to the more common June 30 and December 31).

It’s not just a busy time for corporates and professional investors managing Australia’s more than $2 trillion superannuation pie, but an update for the many “retail investors” who own a slice of the more than 2200 companies listed on the Australian Securities Exchange.

It’s also broader than just individual company profits and dividends – just as important is commentary on the outlook and economy from a range of companies across various industries, providing insights into conditions, trends, policy debates and other major developments such as the looming arrival of Amazon for the retail industry or the outlook for construction activity.

According to the ASX’s annual ownership study done by Deloitte Access Economics, 31 per cent of adults hold shares while a larger 37 per cent, or 6.9 million people, hold investments available through a financial exchange. Westpac alone has more than 600,000 retail shareholders with many more holding shares via their super funds.

The reporting season kicked into gear yesterday when Rio Tinto handed down first half earnings numbers at a topical time for mining companies given the recent bump in the iron ore price. The season winds down when the stragglers report in a month’s time. Overall, the season is tipped to be better than previous years, including the end of the so-called “earnings recession” of recent years, according to broker Morgans.

Strategists are forecasting companies to post headline earnings growth for the financial year of around 13 per cent. However, stripping out resources stocks reduces the growth rate to around 4.5 per cent for the broader industrials sector, according to Morgan Stanley, reflecting the economic headwinds from weak wages growth and consumer uncertainty.

“The set up into full-year 2017 results season is finely balanced,” says Morgan Stanley equity strategist Chris Nicol, explaining that commentary from companies will be critical to how stock prices perform going forward.

“There has been an emerging hunt for optimism as certain macro signals (jobs data, business conditions, Reserve Bank of Australia commentary) point to an upside case for the economy. We are on watch also to see when or if some of these signals will turn up in earnings and or outlooks.”

Ahead of the results, BT Investment Management’s fund managers told clients that Amazon’s looming arrival in the retail sector was a “great example” of the disruption that several industries have faced in recent years, including in media and supermarkets.

Already, Amazon’s confirmation this year of plans to set up a broad, on-the-ground offering in Australia has spurred responses from some players, such as Super Retail Group’s recent announcement of the conversion of its Amart Sports stores into Rebel stores.

BTIM, which Westpac has a minority shareholding in, told clients that despite little information around the timing and scope of Amazon’s entry, Australia had different staff minimum wages, union power, and population density than the US. Listed companies like JB Hi-Fi, Wesfarmers and Baby Bunting may provide updates on the potential impact from Amazon this month.

“At the same time, in markets like the US and UK where Amazon is established, it has not resulted in an obliteration of the retail sector and there has been winners and losers among the ‘bricks and mortar’ chains,” the BTIM fund managers wrote.

Overall, BTIM said the “significant challenges to long-established business models and industry structures” was contributing to the “challenging backdrop” for the stockmarket. Another developing issue for corporates is the resurgent Australian dollar, which has popped back to around US80c, raising risks for companies with offshore earnings, according to UBS strategists.

Andrew Tang, an analyst at stockbroking and wealth management group Morgans, said “upbeat” commentary from companies about their outlooks was needed to provide investors comfort due to “elevated market valuations”.

However, he claimed the reporting season should highlight positives including the “end of the earnings recession” after two straight years of contraction across the market.

“We are confident that the improvement in the economic outlook will translate to earnings over the next 12-18 months so long as the positive conditions are reflected elsewhere, outside of resources,” he said.

“With this in mind, we think outlook commentary and how management chooses to deploy capital may be as important as reported numbers.”

UBS strategist David Cassidy said results from domestically focussed companies across retail, media, gaming, construction materials, developers, contractors and banking will be closely watched for signals on the economy.

“We expect retail results to be very stock specific with both good and bad outcomes being delivered. While not a full reporting season for the bank sector we expect results and trading updates to confirm that the bad debt backdrop remains benign for now,” he said.

This article is general commentary and any view or opinions expressed in this article are the author's own and may not necessarily reflect the view or opinions of Westpac. Any commentary contained in this article is not intended as financial advice and should not be relied upon as such by you.