The past 12-months has seen a range of challenges thrown at equity markets globally. These have been well recorded by financial commentators and include unexpected outcomes with Brexit and the US Presidential election. Despite the widely held view that these outcomes would have been negatively received by investors, global stock markets have continued to push significantly higher. The US market is now up 13% from the Trump election and trading at record highs. A contributing factor has been low interest rates but the other very important influence has been corporate earnings.
During February each year the New Zealand and Australian markets have the first of their semi-annual major reporting seasons. This is the time where those companies that manage to a June or December balance date report their interim and full-year financial results to the market. It is an important time for investors as they are given a more definitive insight into the recent performance of the companies they own and are also typically provided guidance by management as to their forward looking expectations. Going into this reporting season the importance of companies meeting expectations was high, particularly given the strong run in equity prices over recent years and the elevated valuations that are evident across parts of the New Zealand and Australian markets. The tolerance from investors for any disappointment would be low.
In New Zealand the backdrop to the February reporting season was challenged by a sense that towards the end of last year, local earnings momentum had turned down. What this meant was that the expectations that analysts had for the level of profits being generated by our listed companies on aggregate had receded. Typically this type of change would be taken as a negative signal by investors but instead of it representing a troubling read on the overall environment, investors hoped that it was more a case that expectations had simply been set unrealistically high earlier in the year. After readjusting expectations down, market analysts were expecting over 5% growth in overall operating profits for the 6-months ended December 2016 (on a normalized basis after adjusting for outliers such as Air New Zealand).
From an investors perspective the results that we have seen in New Zealand over the past month have been acceptable. In an overall sense, operating revenue and earnings modestly missed expectations but bottom-line profits did surprise on the upside due to lower depreciation and net interest expenses being reported. The most notably disappointing group of stocks that have reported are those exposed to the domestic construction cycle. Although activity levels remain supportive, it appears as if capacity constraints in the industry are resulting in margin pressure. The companies most affected here have included Metro Performance Glass, Steel & Tube and Fletcher Building. Another disappointing performer was Sky Television, which reported a larger than expected deterioration in their subscriber numbers. On the positive side of the ledger Auckland Airport reported solid passenger and retail growth while Trade Me is also seeing evidence of credible operating improvement. Our listed Gentailers, including Contact Energy and Meridian were also positive contributors.
In Australia the experience has been also been supportive for the market with overall results tilted to the positive. The most significant level of earnings growth has come from the mining sector, which is leveraging off the improving prices of commodities. Outside of this sector it has been notable that those businesses with large offshore and US exposure have done well. These include listed companies such as CSL, Resmed and Amcor. The ever important Banking sector delivered a mixed set of outcomes with the Commonwealth Bank positively surprising investors while its competitor, National Australia Bank reported an uninspiring first quarter trading update with cost growth overwhelming improving revenue and bad debts.
An important trend that has been evident in Australia for some time has been the focus by company Boards on dividends and capital management. This was still an important factor in the announcements received by investors during February with many companies still looking to exceed expectations in this area. During the month companies such as Rio Tinto, GPT Group and Transurban were all notable for their positive announcements here.
Looking forward for Australia, earnings expectations for the market have improved. Consensus expectations for headline profits in FY17 are for growth in the high teens. This is largely due to the benefit being accrued to certain sectors from an improving environment for commodity prices. Outside of these sectors the environment is less stellar but still constructive with Financials expected to grow their earnings by almost 7% and the Industrials by almost 5%. In New Zealand the economic environment is expected to remain a supportive platform for our listed corporates with consensus median FY17 earnings growth for the S&P/NZX50 forecast at almost 7%. Overall the past month has seen our local Australasian companies deliver results, which were broadly in line with expectations. Despite valuations remaining a headwind for investors the underlying profit trend is supportive.
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