Earnings Season Observations
The investment landscape remains particularly uncertain at the moment. We are observing a wide range of economic forecasts and a large degree of earnings uncertainty. Implied volatility remains elevated across the developed and emerging equity markets. Earnings uncertainty remains high with many companies continuing to withhold guidance. US companies have recently completed earnings season and the Australian reporting season is ramping up. In this note we take a closer look at some of the recent earnings trends from the US and Australia.
Figure 1. As the US reporting season finishes the Australian reporting season steps up
US Earnings Trends Offer Signs of Stabilisation
The earnings and dividend trends had been well established coming into the start of the US earnings season. The defensive sectors held up better than the cyclical sectors in terms of earnings and dividends. Reflecting the changes in earnings and dividends we observed payout ratios lift from 32% at the end of 2019 to 47% by 30 June 2020. Fortunately the mostly negative earnings trends prior to earnings season did not deteriorate further as companies updated the market in July and August.
In almost all sectors, earnings forecasts were revised slightly higher post reporting. Whilst this is encouraging it is important to remember the trend year to date remains decidedly negative for the majority of S&P 500 Index companies. Looking at the percentage change in company share prices from the day prior to the results, to three days after the result, we can make a number of observations about how the market reacted to the company updates. The Discretionary and Materials sectors performed the best followed closely by Staples. Health care was probably the most interesting underperforming despite seeing reasonable improvements in future earnings and dividends. Will we see similar trends in Australia?
Figure 2. US Reporting Season Summary
Early Earnings Trends from the Australian Reporting Season
The earnings trends in Australia have shown many similarities to those in the US both leading up to 30 June and since the reporting season has started in Australia.
Across most sectors the negative earnings trends have stabilised.
As in the US, the year to date earnings and dividend trends are still negative for most Australian corporates. In Australia, Healthcare companies have disappointed post earnings and the Consumer companies (both Staples and Discretionary) have surprisingly the greatest change in price post earnings. Interestingly the technology sector has seen some profit-taking post reporting so far this season.
Where the results between the US and Australia are differing the most is on dividend expectations. Australia has seen significant downgrades to dividends compared to the US. Of course most Australian companies are typically much higher dividend payers than those in the US. At the end of 2019 the average payout ratios across the S&P/ASX 300 Index was 59%, compared to the US at 32%, and by 30 June this had moved higher to 65%. The Banks have attracted much attention with respect to dividend cuts but as Figure 3 illustrates, it has been broad based across many Australian companies. Based on recent changes in expectations the negative trends for dividends have so far stabilised for Australian sectors except for Real Estate, Industrials and Materials.
Figure 3. Australian reporting season results so far
The Bottom Line
The Australian earnings season is still at an early stage but it does appear that many of the US trends are being echoed in Australia. The pandemic has increased the correlation of global themes. Earnings expectations do appear to be stabilising for now. As the earnings season continues to unfold, we continue to assess the relative merit of our positions and adjust our portfolios accordingly, always looking for the highest quality companies offering reasonable value with improving growth prospects and acceptable levels of volatility. We remain uninvested in the Australian technology sector as it continues to look unattractive from a risk and return perspective.
The above wire is an extract from our latest monthly report which can be accessed here (including sources).
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Bruce is Head of Active Quantitative Equity - Australia, for State Street Global Advisors. He has over 20 years' experience, covering Australian and global equites, long and short equities as well as global macro strategies.
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Head of Portfolio Management – Australia, Active Quantitative Equity
State Street Global Advisors
Bruce is Head of Active Quantitative Equity - Australia, for State Street Global Advisors. He has over 20 years' experience, covering Australian and global equites, long and short equities as well as global macro strategies.
Head of Portfolio Management – Australia, Active Quantitative Equity
State Street Global Advisors
Bruce is Head of Active Quantitative Equity - Australia, for State Street Global Advisors. He has over 20 years' experience, covering Australian and global equites, long and short equities as well as global macro strategies.
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