While reporting season will set the scene for the year ahead, investors can expect a subdued local economy and share market in 2017, while the international backdrop will be more positive. As always, reporting season will turn on how companies perform against expectations. Outside the mining sector, the market in aggregate is at risk of disappointing. Corporate earnings are unlikely to be as strong as expected, particularly among the domestic cyclicals that face an increasingly weak underlying domestic economy. There will be exceptions such as housing-related retailers and mining service companies. Overall however, companies are likely to remain cautious in respect of their outlooks, which may well disappoint investors who have bid up cyclical and ‘value’ stocks.
The exception is the mining companies, which trade more on commodity prices than financial results. Here, earning estimates are not factoring in current spot commodity prices, and have room to continue to rise. As always, reporting season will be good for some, not for others.
The divergence between CSL, which recently upgraded, and Brambles, which recently downgraded, shows that it will all come down to individual performances, regardless of whether they are big stocks, growth stocks or otherwise.
The outlook for the broader market is more muted, with performance hinging on the largest sectors – the banks and miners. Bank share prices have run strongly lately, with very little related to improving fundamentals, indicating limited upside from here. Meanwhile the miners look set to continue to benefit from elevated commodity prices, at least in the short term, although they are vulnerable to a correction in commodity prices on a longer term view. Otherwise, the market faces the risk of its rather bullish sentiment abating, as Trump-based excitement eases, and earnings expectations come back.