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8/2/2019 Olivers Insights the Australian Share Market and Profits
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EDITION 8 7 MARCH 2012
Shane Oliver, Head of Investment Strategy& Chief Economist
This is the worst earnings results since February 2009, during theglobal financial crisis (GFC). Reflecting this, results were greetedcautiously with 52% of company share prices underperformingthe market on the day results were released. While outlookstatements have improved slightly from the last reporting season,the net balance of positive statements remains relatively low.
Outlook statements have become slightly more favourable
Source: AMP Capital
Reflecting the lacklustre reporting season, analyst revisionsto earnings expectations have been generally negative. Thenext chart shows that the number of Australian companiesseeing their earnings forecasts being revised down by analysts,has continued to outweigh the number of companies seeingupgrades. Additionally, the pace of downgrades has been farmore intense than the last couple of years, which partly explainsthe relative underperformance of Australian shares. However, the
good news is that the pace of downwards revisions is slowing,as is the case globally. In fact, based on weekly trends, we believeglobal earnings revisions are likely to turn into net upgrades soon.
Downwards earnings revisions have been more intense in
Australia, but have started to slow globally
Source: Thomson Financial, AMP Capital
The 2011/2012 financial year consensus earnings expectationshave been revised down to 3%, from 7% in late January 2012 andfrom 14% a year ago. The downgrades have been concentrated toresource, insurance, media and other financials sectors.
Key themesSeveral key themes have become apparent. Firstly, earningsgrowth was non-existent through 2011. Aggregate earnings havebeen effectively flat or slightly lower compared to the December2010 half-year results.
Secondly, the weakness in earnings was broadly based acrossall major sectors with resource profits down slightly, non-bank
industrials flat and banks slightly up. A similar message is apparentfrom the Australian Bureau of Statistics with their measure ofprofits up just 2.7% compared to a year ago which were up 20%.
Thirdly, the weakness in profits reflects a combination of factorswith the main ones being weak domestic demand, the strong A$and commodity price softness during the second half of last year.
OliversInsights
Key points> The December half-year reporting season was lacklustre,
with fairly flat profits.
> Profit growth is likely to pick-up in the coming year but still
lag consensus expectations for double digit growth.
> Australian shares are likely to rise over the year ahead asvaluations are attractive and global shares are likely to rise,
although we expect Australian shares to remain a relative
underperformer for a while yet.
IntroductionThere were plenty of nerves around leading into Februarywith announcements of December 2011 half-year reportingin Australia. Domestic demand has been weak, the strongAustralian dollar (A$) is bearing down on trade-exposed sectorsand resource sector profits were coming off a high base withcommodity prices falling in the second half of 2011. The results
were pretty much as expected, in a word: lacklustre.
Reporting season wrap upIn good news, most companies saw profit growth over the last
year, with 68% of companies reporting a profit increase.
Australian company profits relative to a year ago
Source: AMP Capital
Against this, only 31% of results announced beat expectations,down from the 37% of companies that beat expectations for theJune 2011 half-year results and well below the norm of 45%.
Australian profit results relative to market expectations
Source: AMP Capital
The Australian sharemarket and profits
0102030405060708090
100
Feb 07 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Feb 12
Reporting season
down
up
Percentage of company profit results
79 89 67
21 11 33 27
73 50
50
42
58 41
59 70
30
67
33
67
33
68
32
(%)
0
102030405060708090
100
Feb05
Aug05
Feb06
Aug06
Feb07
Aug07
Feb08
Aug08
Feb09
Aug09
Feb10
Aug10
Feb11
Aug11
Feb12
Reporting season
In line
Below
Above
Percentage of results
64 58 49 49
11 1827 39
25 24 24 12
47
36
17
44
39
17
38
29
33
27
43
30
27
37
36
44
38
18
49
29
22
38
39
23
37
31
32
37
36
27
31
46
23
(%)
-80-60-40-20
020406080
Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Feb 12
Reporting season
Net balance of positi ve le ss negative outlook statements
(%)
-80-60-40-20
020406080
00 01 02 03 04 05 06 07 08 09 10 11 12
Net, percentage consensus earnings revisions up versus down
World
Australia
Net positive revisions
Net negativerevisions
(%)
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8/2/2019 Olivers Insights the Australian Share Market and Profits
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Contact usIf you would like to know more about how AMP Capital can help you, please visit ampcapital.com.au, or contact one of the following:
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Wholesale Investors AMP Capitals Client ServicesTeam on 1800 658 404
Important note: While every care has been taken in the preparation of this document,AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no
representation or warranty as to the accuracy or completeness of any statement in itincluding, without limitation, any forecasts. Past performance is not a reliable indicator
of future performance. This document has been prepared for the purpose of providinggeneral information, without taking account of any particular investors objectives,financial situation or needs. An investor should, before making any investmentdecisions, consider the appropriateness of the information in this document, andseek professional advice, having regard to the investors objectives, financial situation
and needs. This document is solely for the use of the party to whom it is provided. OI_070312
Non-bank industrials have been hit by a combination of weakdomestic demand, sticky cost bases which partly reflect the 2010surge in workforces and the strong A$ bearing down on tradeexposed sectors. Additionally, industrial sector profits have beendoing it tough since before the GFC.
Non-banks industrials earnings per share growth
Source: Deutsche Bank
Banks have seen profit growth slow to a crawl on the back of softcredit growth, pressure on bank margins from higher fundingcosts and disappointing trading income.
Resources have seen profits stall, partly reflecting the high baseof 2010 but also a fall back in commodity prices during thesecond half of 2011 as well as increased costs associated withbooming mining investments.
Of course there have been some pockets of strength, such as
within mining services companies, which have benefitted fromthe surge in mining related investment as well as within healthcare stocks, among high quality franchises such as CSL, Cochlearand Resmed. The overall softness in profits is a confirmation ofthe broader weakness in much of the Australian economy.
OutlookConsensus earnings expectations are for 12.6% earnings growthin 2012/2013 financial year.
Australian share market earnings per share growth
Source: UBS
Profit growth is likely to pick up over the next financial year. Theresources sector, in particular, is likely to benefit from an ongoingglobal recovery, modestly higher commodity prices and a risein production. Industrials are likely to benefit from corporaterestructuring, further falls in interest rates and an eventual pick-up in domestic demand, which should result in some marginexpansion. Consensus expectations for margins are also more
realistic than they were six to 12 months ago; however, profitgrowth is still unlikely to meet current consensus expectationsfor the 2012/2013 financial year. We estimate an outcome ofaround 7% growth more likely, attributed to the likelihood that
domestic demand will remain constrained and the A$ willremain strong.
Where does this leave Australian shares?A further downgrade in expected earnings growth is likely duringthe year ahead. The Australian share market is trading on aforward price to earnings (PE) ratio of 11.5 times. This is downsubstantially from 12.9 times a year ago. Even if the year aheadearnings expectations are downgraded by a further 5%, thiswould still leave room for circa 8% capital growth if the marketwere to rise to a forward PE ratio of 13 times. This level is below
the markets 15 year average PE ratio of 14.5 times, but may beappropriate for the more volatile environment we are in.
Another positive is that with corporate cash holdings at recordlevels and low gearing, there is plenty of scope for furtherincreases in dividends, buybacks and other corporate activitygoing forward.
Australian corporate sector gearing is benign and cash holdings
are at record levels
Source: RBA, AMP Capital
Notwithstanding the risk of a short-term correction, further gainsin global shares on the back of attractive valuations, continuingglobal recovery, easy monetary conditions and decreasing risk ofa European melt-down are likely to help pull up the local sharemarket over the coming year.
For the time being, the Australian share market is likely to remaina relative underperformer. Since late 2009, Australian shareshave underperformed their global counterparts, thanks to acombination of tougher domestic monetary conditions whichhas constrained domestic demand and limited the flow of fundsinto shares. Additionally, the strong A$ and worries about a hardlanding in China have adversely impacted markets.
Fears of a Chinese hard landing are likely to recede further.However, there is unlikely to be much relief in terms of the strongA$ (barring another GFC-like event, which would obviously bebad news) and monetary conditions in Australia are unlikely toease much, relative to the US and Europe. This suggests thatAustralian shares could rise further this year, but continue to lagglobal shares for a while yet.
Dr Shane OliverHead of Investment Strategy and Chief EconomistAMP Capital Investors
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1988 1992 1996 2000 2004 2008 2012
Financial years, percentage change Consensusforecasts
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(%)
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010
20
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1991 1995 1999 2003 2007 2011
Financial years, percentage change Consensusforecasts
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140
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88 90 92 94 96 98 00 02 04 06 08 104
68
10
12
14
16
18
Bank deposits relative toliabilities (RHS)
Debt relative toequity (LHS)
Private non-financial corporate sector
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