We are currently in the midst of the mid-year Australian company reporting season. Listed companies with a 30 June year end date must report their profit results to the market by the end of August 2016.
Our expectations for this profit season are as follows:
The major banks have all reported now, and as expected, their cash profits are broadly in line with last year. Dividends are expected to be slightly below those paid last year. Bank earnings are forecast to be flat over the next 2 years mainly due to the fact that Net Interest Margins are expected to be flat or slightly lower over that period.
For many resource companies, the prices for the commodities they produce are currently at cyclical lows. This is especially so for iron ore and oil – the two most important commodity markets for the large Australian mining companies. As a result, 2016 profits for most resource companies are likely to be significantly lower than last year. We expect that 2016 will be the low in the profit cycle for resource companies and that their profits will gradually recover over the next few years. We believe that these expected lower earnings results have already been factored into the current share price of resource stocks.
We currently see the key growth sectors as healthcare, telecommunications and technology. We expect the major companies within each of these sectors to provide good earnings growth and strong dividends in 2016.
However, as these stocks have been performing well for sometime now, their strong earnings growth forecast is likely to have been already factored into their current share price. This means that if any of these companies were to record earnings growth below the level expected by the market, we may see their share price drop.
High share price movements on the day of earnings result announcements are not unusual. In some cases, the drop (if the result is below market expectations) or increase (if the result is above expectations) in the share price on the day an earnings result can be up to 20% or more. A good example of this from the current reporting season is Ansell Limited (ASX Code ANN) which reported a strong outlook for 2017 on 15 August 2016. ANN’s share price rose nearly 18% on that day.
In positioning our client’s portfolios, we currently hold an overweight position to growth sectors such as healthcare, telecommunications and technology. This tactical positioning has seen our portfolios outperform their benchmark over three and five year periods. Please contact us to discuss any investment or financial planning matters further.