Where Aussie company earnings stand

Australian companies saw their revenues remain strong as consumer confidence showed resilience in spending, even though there were signs of slowdown, according to the February reporting season.

However, according to Martin Currie, margin pressures were beginning to bite earnings growth as sales slowed and costs continued to rise, even before the likely future interest rate rises and mortgage cliffs.

“In the six months since we provided our last wrap of Australia’s reporting season, we have really seen the significant Reserve Bank of Australia (RBA) rate rises and inflation impacts that were just beginning to show,” Reece Birtles, chief investment officer, Martin Currie Australia, said.

“As the world continues to normalise to higher rates and long-term inflation expectations, the market thematic continues to play towards an ongoing attractive environment for the value style.

“It is as important as ever for investors to be discerning in their stock picking, focussing on companies that can grow earnings and dividends in this environment and not be exposed to valuation risk.”

According to the manager, expected earnings growth for the next twelve-months was now closer to zero, but there was still a strong contrast across the sectors.

“The potential uncertainty of capital funding availability for companies with lower quality balance sheets in the wake of the SVB collapse will bring added uncertainty. So, the question remains, are we looking over the edge of an earnings recession, a real GDP recession, or both?

Martin Currie’s bi-annual reporting season paper determined that whatever flavour of recession arrives, the best way to position portfolios for this outcome would be through lowering the beta of  portfolios, and focussing on companies that can grow earnings and dividends in the higher rate environment and not be exposed to valuation risk.

“As the world continues to normalise on rates and long-term inflation expectations, we believe that it is very important to avoid the expensive stocks that have further to fall.

“These conditions continue to provide a clearer tailwind for the value style. Value stocks are still far cheaper today relative to history. As these extremes will inevitably unwind, the valuation starting point for excess returns to value investing is strong for the next decade.

“We would note that recent strong returns for value will also continue to pressure those investors who had moved to underweight value strategies to reassess their asset allocations, potentially redirecting flows back toward value managers.