The Match Out: Resource holds up a weak underlying market, our take on Reporting

While the index was largely unchanged, there were some big swings from a sector point of view. Both the materials and energy sector was strong, but that’s where the good news ended. The remaining nine sectors closed lower, albeit dividends weighing on some areas more than others as a total of 9 shares in the index traded ex-dividend today. Locally, Building Permits data fell -27.6% month on month, well below expectations, initially causing Australian bond yields to fall before reversing and closing higher on the day.

• The ASX 200 finished up 3pts/ +0.05% at 7255
• The Materials sector (+2.89%) was best on ground, followed by Energy (+1.44%)
• Financials (-1.91%), Consumer Staples (-1.32%) & Tech (-0.82%) were the weakest links.
• Karoon Energy (ASX: KAR) -3.57%, said the new Brazilian tax on oil exports would see the company take a $US22-35m hit. The tax is only expected to be in place for four months.
• St Barbara (ASX: SBM) -3.48%, struggled after saying its Canadian asset may be put on care & maintenance early next year following an information request from the Nova Scotian Minister for the Environment. The company is hoping to spin the asset out alongside a deal with Genesis (GMD).
• Macquarie (ASX: MQG) -2.14%, media reports saying the investment bank is looking to acquire UK Fund Manager M&G which runs $623m.
• Gold drifted lower in Asian trade today, settled $US1834 at our close, down -0.15%.
• Iron Ore rallied more than 1%. Fortescue (FMG) & RIO both jumped more than 4% and were key to the index closing marginally higher..
• Asian stocks were mixed, Hong Kong fell -0.60%, and Japan flat.
• US Futures are currently mixed – S&P -0.45%, Nasdaq -0.55% but the Dow futures showing +0.17%.

ASX 200 - Intraday chart

ASX 200 - Daily chart

Reporting – not great but not a disaster!

As always, there are a lot of moving parts when it comes to reporting and these interim results were no different. We’ve now had a chance to reflect on what we saw, heard & read with some key takeaways outlined below. 

Overall, it seems likely earnings have peaked and we’re now in for a tougher period, however, it’s not all bad news. It fits with our thinking that the RBA is too positive in their assumptions around the health of the Australian economy and as a result, far too hawkish on interest rates. 

While earnings may have peaked overall, pockets of the market are still performing while rates in Market Matters’ view will not reach the height that markets are currently pricing in, so the headwind on valuations from sharply higher yields may ease.

• More companies missed expectations than beat, but it wasn’t by a lot. While the companies that missed saw ongoing underperformance i.e. the strong became more highly valued than the weak.
• Ahead of reporting, analysts were expecting earnings growth year on year of +7.3%. As we exit reporting, that number sits at +6.6%, a reduction of 0.7% - down but not a disaster.
• Resources companies battling with higher costs were the main drag here, and while it’s a negative, we can’t help but think these pressures will improve as tightness in the labour market ultimately eases.
• We actually saw some pockets of consumer strength, so instead of all retailers struggling, there was a greater divergence of outcomes. Big ticket items, lounges, white goods etc is a tougher ask, but smaller items, or retailers that give options to trade down, did pretty well.
• Extrapolating Commonwealth Bank (ASX: CBA)’s result across the banks, they are in very good shape, the market just got spooked by commentary of intense competition eroding the benefit of higher rates on margins. There wasn’t anything sinister (yet) in bank updates.
• There was clear caution on what comes next and an acknowledgment that the next 6 months will be tougher, although it wasn’t the case across the board implying more of a ‘patchy’ slowdown than a deep and wide recession.
• Labour shortages were the number one issue at FY22 results six months ago, but in the most part, this has improved, though wage pressure is still bubbling away, more so in some sectors like mining.
• Inflation is there for all to see, but many companies are having success passing on price rises to protect margins, although that is a blanket comment and many would disagree (Mr Meij at the top of the list here).
• The housing market is weak, and that’s flowing into weakness more broadly, but some areas have remained immune, like travel.
• Companies are still planning to spend, with capex intentions remaining robust.

All in all, a patchy period rather than a universally weak one, the second half will be interesting and we need to be on our toes, but it would be a mistake to think a hard landing is a fait accompli.

Broker Moves

• Neuren Rated New Overweight at Wilsons; PT A$11.24
• Centuria Office REIT Cut to Underweight at Jarden Securities
• Stockland Cut to Underweight at Jarden Securities; PT A$3.70
• Goodman Group Raised to Overweight at Jarden Securities
• CQE AU Raised to Overweight at Jarden Securities; PT A$3.60
• Centuria Industrial Cut to Underweight at Jarden Securities
• Mayne Pharma Cut to Hold at Canaccord; PT A$3.80
• Novonix Cut to Hold at Morgans Financial Limited; PT A$1.44
• Seven Group Rated New Positive at Evans & Partners Pty Ltd

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