By Gus McCubbing
Big investors are bracing for a particularly painful corporate confession season as the conflict in the Middle East continues and the Trump administration weighs up new strikes against Iran, hitting company earnings and increasing the likelihood of interest rate rises.
More than 21 companies have already released trading updates referencing the Middle East conflict since it began in late February, according to UBS.
These include the airlines and major banks, engineering giant Worley, waste management company Cleanaway, toll road group Transurban, leisure operator EVT and hearing implant company Cochlear.
And in bad news for investors, analysts are now factoring in the possibility of a return to hostilities and a prolonged shutdown of the Strait of Hormuz.
“The world is scrambling to find and secure barrels [of oil],” said Westpac’s commodity strategist, Robert Rennie, on Friday.
“That means that real-economy fuel costs are likely to continue rising much more, and stay elevated for much longer than the market currently anticipates.
“With Trump ripping away the security blanket the market has been clinging to for the last two months – the hope that the war was about to end – traders are now being forced to confront a much uglier reality: that both sides still think they are winning, that neither side has a clear incentive to negotiate and that energy prices are starting to accelerate higher.”
Those comments came after US President Donald Trump said he would continue a naval blockade of Iranian ports.
Authorities in Tehran also cast doubt on the likelihood of a permanent peace deal, vowing to maintain control of the strait – a vital waterway through which one-fifth of the world’s oil flows, and which has effectively been closed for two months.
The blockage of the strait has pushed oil prices up 25 per cent since the conflict began in on February 28.
Brent crude traded for about $US112 a barrel on Friday after reaching a wartime high of $US126 a barrel on Thursday.
It all adds up to what will likely be a particularly busy confession season, which kicks off next week at Macquarie’s annual Australian investment conference.
A raft of companies, particularly those in the retail sector, are expected to come clean about hits to earnings from the ongoing Iran war.
“You’ve got higher interest rates, higher petrol prices and cost-of-living issues, so investors are braced for a pretty challenging path forward for retailers,” said Glenmore Asset Management founder Robert Gregory.
“And the next three to six months are looking challenging for the ASX overall.”
Sharemarket trails overseas results
During confession season, the small- and mid-cap investor will keep a close tab on commentary from home furnishing retailers Adairs and Nick Scali, whose share prices have plunged this year, along with jeweller Lovisa.
The S&P/ASX 200 Index gained about 1 per cent on Friday to snap an eight-day losing streak, its worst run since 2018. The local stock exchange has barely broken even so far this year, up just 0.5 per cent as of Friday afternoon.
This compares with a 5.3 per cent year-to-date rise for the S&P500 and a 4.5 per cent increase for Britain’s FTSE 100.
Meanwhile, Asian markets have been soaring on strong technology earnings and momentum from artificial intelligence, with Japan’s sharemarket up almost 20 per cent and South Korea’s soaring 56 per cent.
A growing inflation problem, which began before the United States and Israel first bombed Iran and has been exacerbated by the ongoing conflict, has soured the picture for the ASX, with Westpac, Deutsche Bank, UBS and HSBC all tipping the Reserve Bank of Australia will increase interest rates next week.
That was after data released this week showed that inflation hit 3.5 per cent in 12 months to March, well above the RBA’s 2.5 per cent target.
A rate rise on Tuesday, the third this year, would bring the cash rate to 4.35 per cent and highlight the RBA’s divergence from other jurisdictions, with central banks in the US, Canada, Britain and Europe all holding rates steady this week.
“The ASX has been the laggard among global indices because we’re facing a lot of headwinds,” said Wilson Asset Management strategist Damien Boey.
“The market has had to digest the fact that there is surely an earnings hit coming up, which has made people nervous.”
A third rate rise would heap more pressure on mortgage-holders, with consumers already facing an extra sting at supermarket check-outs after Coles and Woolworths warned that rising costs were imminent.
War hits retail sector
The Iran war has also resulted in private equity’s hot breath on the neck of sold-down ASX-listed companies, with IFM Investors lobbing a hostile bid for toll road operator Atlas Arteria on Monday, before Pacific Equity Partners fired an offer for outdoor advertiser oOh!media on Wednesday.
“Private capital, with what appears to be a longer time horizon and a higher tolerance for near-term uncertainty, is exploiting public markets’ skittishness,” said Morningstar market strategist Lochlan Halloway.
Seneca portfolio manager Luke Laretive said his eye was on the retail sector, pointing out that even luxury brands such as Louis Vuitton’s parent company LVMH, Ferrari, Hermes, and Richemont, which owns Cartier, have suffered double-digit share price falls this year.
“Households are stretched. There is a lot of doom and gloom out there,” he said.
Laretive likes Lovisa, consumer and commercial financing group Credit Corp, and Australia’s largest manufacturer and retailer of 4WD parts and accessories, ARB Corporation, all trading at near 10-year low valuations.
On the other hand, Ten Cap founder Jun Bei Liu has recently added to her positions in family tracking app Life360, which has come off more than 60 per cent from its October record, as well as plumbing business Reliance Worldwide, copper producer Sandfire Resources and Domino’s Pizza.
Solaris Investment Management portfolio manager Charles Story warned that the overall market could be sold down in the short to medium term, given the ASX was currently trading at about 17 times earnings when the long-term average was 15 times.
Story said that although the health of the Australian consumer would be a key focus during confession season, he would also pay close attention to the winners and losers in the resources sector.
“Lithium and rare earths are benefiting from tight supply and demand dynamics,” he said.
“But we believe the party is over for ASX-listed gold companies after a stellar two-year run – we are becoming more concerned about margin compression from persistent cost inflation.”
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