COVID losers to power ahead this reporting season

On this episode of Four Minute Monday, I was asked for my take on what the just-started Reporting Season holds. One thing seemed readily clear. We're not heading into a blizzard of champagne corks and bunting. Omicron border closures, supply logistics and cost pressures all point to subdued expectations. But no surprises there. 

That said one dynamic did emerge that, if unexpected, is at least explicable: The transition of some so-called COVID losers into the winners' circle. With our coming out of a number of restrictions and lockdowns, borders are likely to reopen during 2022, so although earnings will be quite modest, the COVID losers may do much better in this reporting season.

For my thoughts on that and the growth-value rotation, and to hear my reviews of Macquarie, CBA, Suncorp ANZ, IAG and Westpac, please enjoy the podcast below.

What's your outlook for this earning season?

We're unlikely to be receiving many positive outlook statements for most of the market this earnings season given the current situation we're in with the Omicron virus. We're also seeing cost pressures and input constraints likely to be caught out given the tight logistic markets we're seeing globally, which are quite acute.

Even in the first week of reporting season there were a number of companies that have really called this out. The stressed supply chains are increasing costs around shipping and also making it difficult to access inputs into their businesses. Labour shortages are also an ongoing issue being called out by many companies.

This has been exacerbated by state borders remaining closed in some instances, and obviously, international borders remain quite tight.

During this reporting season, there's likely to be a divergence between the COVID winners and losers, as there has been over the last few reporting seasons. I expect the market will likely look through this, given that it's well known as is the continuing relaxation of the restrictions and lockdowns with borders likely to be fully reopen during 2022. Therefore the expectation is that the COVID losers may do much better in this reporting season, despite the fact that earnings will be quite modest.

Do you expect to continue to see value and cyclicals outperform tech stocks?

The recent sharp rotation from growth to value has really been driven by a more hawkish central bank outlook, particularly around the Fed increasing real rates which really weigh heavily on these long duration growth stocks and tech names. The expectation, given that central banks are starting to raise rates - we saw the bank of England raise rates last week - will weigh heavily on these long duration growth stocks. The value rotation in Australia has lagged substantially compared to global markets over 2021. Albeit during January, it did perform in line with global markets. The value dispersion in the ASX 200 is still close to all-time highs and my expectation is that this rotation has somewhere to go with value having its day in the sun over 2022.

What are you reviewing this week?

This week a number of financials are reporting including Macquarie, CBA, Suncorp ANZ, and IAG. It will be quite an interesting week with NIM pressures something that I’ll be looking closely at, especially with CBA given what they reported in their quarterly report a few months ago. Their NIM had been adversely impacted by their back book repricing, particularly around their fixed rate loans. Westpac last week also report quite modest NIM margins as well. Increasing interest rates across the curve is positive for insurance companies and so outlook statements from insurance companies will be interesting to see whether they're looking at increased earnings from this avenue. Certainly, we're seeing hardening rates globally in their insurance margins. Financials will certainly be a focus this week.

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Throughout February, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the “follow” button below to stay up to date.