Sharp falls on the sharemarket in January created a dramatic backdrop for the recent interim reporting season. In spite of volatile market conditions and low expectations, company results announced in recent weeks have been relatively good overall.
Most businesses have completed their cost-out programs and in some cases are starting to experience strong revenue growth as a direct result, while others are benefiting from the weak Australian dollar.
Negative sentiment overrode results
In 2016 the local bourse experienced its worst start to the calendar year since 2010 with the S&P/ASX All Ordinaries Accumulation Index plunging 5.4 per cent in January.
The dramatic slide in oil prices, deteriorating credit markets and widespread anxiety about the growth prospects of the global economy all weighed heavily on domestic and international equities.
The ongoing fall in commodity prices put additional downward pressure on the Australian sharemarket. As a result of the prevailing macroeconomic climate, the overall tenor of the market leading into reporting season was fairly bearish, with expectations calibrated accordingly.
Early in the reporting season, adverse macroeconomic factors continued to influence investors’ attitudes. Australia’s sharemarket continued its descent, falling 5.5 per cent during the first two weeks of February.
The market’s negative sentiment overrode the positive results delivered by a number of companies during the early stages of the season and created considerable share price volatility, particularly for businesses with high levels of debt.
Upside of weak Australian dollar
The weaker Australian dollar has been a boon for companies with overseas earnings.
More than 40 per cent of the revenue of Australia’s top 200 companies is derived from offshore operations and so the weakening Australian dollar has mitigated any fall in the earnings of these companies.
Import-based businesses could reasonably be expected to be losers from a softer currency, however, a number of these companies have managed to maintain their margins by raising prices.
This strategy has delivered strong profit growth for The Reject Shop Limited and Pacific Brands Limited, which manufacturers Bonds and Berlei underwear and Sheridan manchester.
Retail and industrials winners
The Reject Shop and Pacific Brands joined other retail businesses such as Athlete’s Foot and RCG Corporation, owner of Athlete’s Foot and Podium Sports, in reporting increases in their profit figures.
In the latter part of last year, the retail sector benefited from the uptick in consumer sentiment following the appointment of Malcolm Turnbull as prime minister in September.
Similarly, industrial companies performed well overall, delivering on expectations and reflecting the high price to earnings multiples many of them are trading on.
A handful of companies announced profit upgrades with demand for their products and services being driven by their investment in technology.
Domino’s Pizza Enterprises is one example, with the pizza delivery business leading itd field by utilising innovative technology.
The company attributed (in part) the strong growth in its first-half profit to the successful roll-out of the GPS Driver Tracker technology across all of its stores.
Looking ahead, Domino’s’ CEO and managing director Don Meij anticipates the significant investment in its digital pipeline will continue to improve the business’s productivity and drive sales.
More pain for miners
Conversely, the embattled mining sector suffered a very poor reporting season. Mining and mining-related companies are experiencing the flow-on effects of the steep falls in commodity prices, with firms now seeing this factor starting to affect their bottom lines.
One notable and high-profile instance is the “Big Australian”, BHP Billiton. BHP posted a large fall in profit and noted that significantly weaker commodity prices were having a negative effect on the company’s profitability.
With market volatility set to continue, performance has been, and will continue to be, limited to a number of industry sectors and will be very much stock-specific, based on a company’s strong fundamentals.
The market officially entered a bear market in February, falling 20 per cent off the April 2015 highs.
In our view, the market still has further to fall, however, we believe that over the course of a bear market, opportunities will become more apparent.
A review of past bear markets shows that after reaching its low point, the sharemarket rebounds sharply and the majority of gains are made in the period immediately after the market hits the bottom.