By William McInnes
Investors have been left in the dark following the August earnings season, with this week’s release of the second-quarter GDP figures set to give further insight into just how damaging the COVID-19 pandemic has been on the economy but unlikely to provide much illumination for the path ahead.
ASX futures were down 40 points, or 0.7 per cent, ahead of the market open on Monday, with shareholders largely flying blind for the year ahead, after companies offered only limited earnings guidance and sounded caution on what the end of JobKeeper could mean for balance sheets.
“The outlook is still highly uncertain,” Perpetual head of investment strategy Matt Sherwood said.
“We’re dealing with uncertain events and there’s some sizeable tail risks out there.”
Despite the sizeable tail risks in the domestic economy, the Australian dollar shot 1.5 per cent higher to US73.66¢ on Friday, with the US dollar weakening significantly following the Federal Reserve’s decision to dump its policy of deploying monetary policy to maintain 2 per cent inflation.
While Australian businesses have seen positive trends in the first weeks of the new financial year, the phasing out of the JobKeeper support payment, potential for further lockdown measures and uncertainty over the trajectory of the economic recovery has left companies reluctant to provide shareholders with forecasts for the year ahead.
Investors had been out in the cold heading in to the earnings season, with a flurry of companies abandoning guidance months out from reporting their results as they struggled to keep up with the rapidly changing macro environment.
While companies have now reported on how they navigated the major lockdown period during the June quarter, they have given little indication as to how they expect to perform through the recovery phase.
“As corporate Australia navigates its way through the economic reopening there has been little guidance in the current earnings season on what to expect, adding to investor uncertainty,” JPMorgan Asset Management global market strategist Kerry Craig said.
The results from the August earnings season are already dated, given companies were reporting results before the introduction of restrictive lockdowns in both Victoria and New Zealand.
Even stocks such as JB Hi-Fi, which experienced soaring sales in the June quarter, failed to provide guidance to the market. With a high level of uncertainty over how the economy will perform as wage subsidies such as JobKeeper wear off, brokers warn the end of stimulus would curtail retail spending.
“Companies are unwilling and sensibly not providing guidance because there are too many uncertainties with how the recovery looks and what government and central bank policies will be extended or changed,” Wilson Asset Management lead portfolio manager Matthew Haupt said.
“Companies that provided guidance were judged more harshly than ones that didn’t provide guidance. If guidance has been given, you would assume there would be a lot of conservatism backed into those guidance expectations.”
Wednesday’s gross domestic product report could show just how important the JobKeeper payment was in supporting the economy through the June quarter, although the earnings season has already given investors insight as to how companies performed during the period, which means the local sharemarket reaction is likely to be muted.
“June quarter GDP will be interesting for about a day and then markets will move beyond it,” Mr Sherwood said.
“And if we look forward at the shape of the recovery, it’s not the September quarter that’s important, it’s the December quarter. I don’t think we’re expecting much of an economic rebound in September but we are facing a fiscal cliff in the December quarter.”
Figures for the December quarter GDP will not be released until early 2021 when most companies will be reporting once again, meaning investors will have to rely on the trickle of market updates and economic data until then.
With the economic outlook already uncertain, investors could find themselves even more in the dark. The Morrison government is reportedly working on permanently easing the sharemarket continuous disclosure rules, making it harder for disgruntled shareholders to launch civil actions.
The government had given companies temporary reprieve from the continuous disclosure rules earlier in the year, meaning companies and their officers would only be liable for continuous disclosure breaches if there is “knowledge, recklessness or negligence” with respect to updates on price-sensitive information.
For investors searching for income, the uncertainty will be particularly painful, with more companies set to hang on to cash while the outlook remains clouded.
“There are dividends and income to be found but investors will have to search much harder for it, and may be less comfortable with where they find it,” Mr Craig said.
“Dividends and equity income from the Australian market will remain challenged for some time, and this may lead to a rethink of how investors approach what was an income-rich market.”