7 key themes (and 4 stocks) to watch this ASX reporting season

Investors have arrived at one of the most important and fascinating earnings periods in a long time. Weaker profit growth and cautious guidance statements look likely to dominate the upcoming annual results season. 

After all, the list of headwinds is plentiful and many of them remain unresolved. Is the Reserve Bank's July pause actually going to stick this time? Australian inflation sits at 6% but which businesses will bear the brunt (and benefit) of those increased costs? Can the leading economic indicators break out of their long and sluggish downtrend? 

And most importantly, which corporates will handle this uncertain environment best?

Most of these questions will be answered over the next four weeks. To get you ahead of the curve and make sure you're prepared for the torrent of results and themes to come, Livewire presents the August reporting season edition of Signal or Noise.

I am delighted to be joined by three of Australia's top macro minds. Between them, they manage billions and advise both institutional and retail clients. 

• Shane Oliver, Chief Economist and Head of Investment Strategy at AMP
• Randal Jenneke, Head of Australian Equities and Portfolio Manager at T. Rowe Price
• Jason Kim, Portfolio Manager and Senior Analyst at Tyndall Asset Management

Note: This episode was taped on Wednesday 26 July 2023. You can watch the show, listen to the podcast, or read the edited summary below.

What is the biggest question or macro issue you want answered this earnings season?

Shane: The strength of the consumer is the "great unknown" in his view. How will consumers respond to companies in a world that is still trying to process interest rates with a 4-handle? 

Jason: One of the biggest questions is whether China will meaningfully stimulate its economy following its less-than-stellar reopening. The answer will have major implications for about 50% of the ASX. 

Randal: Margins will be critical this time around. He is curious to see how slowing revenues and rising costs will influence the earnings profile of most companies. 

Beyond reporting season, Shane is watching four key themes heading into the end of the year:

• Will disinflation continue in Australia?
• Can business activity break out of its multi-month downtrend?
• The bond-earnings yield gap 
• The direction of the US Dollar

Is the quality trade too crowded?

Jason: SIGNAL - Not all quality-oriented names have stretched valuations but the Tyndall team plan to use this opportunity to trim positions and buy into other and cheaper names. 

Randal: NOISE - The slowdown is ahead of us and we are only at the early stages of a corporate downturn. Where the risks are skewed to the downside, the T. Rowe Price team believes you should be leaning into quality. 

Shane: NOISE - The risk of recession is now much higher in Australia which explains why quality-oriented assets have done well. Given we are seeing more of those excess savings being used up and the bulk of the fixed-rate mortgage roll-off is still coming. 

Is paying up only going to lead to disappointment?

Randal: NOISE - A high P/E multiple doesn't give you the whole story and investors should take a much more discerning view of a business' future prospects. For high-growth names with those extreme P/Es, it will all come down to whether their results can match their hype.

Shane: NOISE - He is concerned about the divergence between bond yields and earnings yields. As bond yields stay high, the risk of a revaluation is ever-present and at some point, P/Es will need to come back down to earth.

Jason: SIGNAL - You need to scratch beneath the surface of a company's valuations to realise which ones have earned the right to a higher-than-market P/E ratio. Generally, Jason's view is that many companies are trading on multiples that are "way too high" and "should be sold down."

Jason and Randal were then asked to nominate one low P/E stock which could be worth a look going into earnings season. 

Jason: QBE Insurance (ASX: QBE) trades at well below the market's earnings ratio. He says it's got all the hallmarks of a company that can benefit from rising interest rates. With insurance premiums increasing at their fastest pace since 2000, he thinks it could be a $20+ stock in 12 months' time. 

Randal: While many parts of the market aren't priced for a recession, consumer discretionary stocks like Harvey Norman (ASX: HVN) are one of them. But with its big dividends and exposure to the housing story, he argues it's a good stock to own if you can look through the next 12 months. 

Are 6%+ dividend yields on some stocks sustainable?

Shane: NOISE - They certainly are not sustainable at the top end especially given commodity prices have been retreating from recent highs in both crude oil and iron ore. He's far more interested in whether the companies with a 6% dividend yield can maintain their payouts rather than the companies with a near-10% dividend yield.

Jason: SIGNAL - With commodity prices expected to remain stronger for longer, dividend yields will likely remain elevated for a time to come. Even in the case of the Big Four banks, their balance sheets are flush with capital which should be returned to shareholders.

Randal: NOISE - To quote the investing adage, "more money has been lost chasing higher dividend yields than down the barrel of a gun". Or put more simply, dividends follow earnings. And in a world where earnings and margins will be under pressure, it's unlikely that dividends will remain this elevated.

Jason and Randal were then asked to name one stock on their watchlist for reporting season.

Jason: Although it's a name that attracts a high P/E, Jason is keen to see if ResMed (ASX: RMD) is able to work through its supply chain crisis. He also wants to see if the company can further capitalise on its major competitor's product recalls and gain more market share.

Randal: With all the discussions around the credit default cycle and increasing competition in both the deposit and mortgage markets, he is paying close attention to the numbers of Commonwealth Bank (ASX: CBA).

The Charts to Watch

Livewire and Market Index's full coverage of the August 2023 Reporting Season starts with our write-up of the Sandfire Resources result which is being released today.