While it may be only short term, the Government’s stimulus measures over the past 12 months have helped Australia’s listed companies to their best half-yearly reporting season in ten years.
In its latest report on the state of the companies following their shareholder reports for the six months to December, equities manager Martin Currie Australia (MCA) says that the market now expects that earnings will be back to pre-COVID levels within the next 12 months.
Reece Birtles, MCA’s chief investment officer, says: “The vaccine news, ongoing stimulus, and strong economic indicators have changed the COVID-focused downturn narrative to one of recovery.
“The strong confidence in the future really comes from the impact of substantial monetary and fiscal stimulus… but this is also fuelling potential inflationary pressure.”
The reporting season over February produced the strongest revisions in earnings per share (EPS) seen for Australian companies for ten years.
MCA’s assessment was based on about 100 interviews and other engagements with companies following their results, as well as an analysis of the figures and other sources of research.
One of the main implications for investors, alongside bond yields and the possibilities for inflation, is the valuation differential between ‘value’ and ‘growth’ stocks.
“Now that economic growth is accelerating, we expect to see the valuation premium of growth stocks coming down, while traditional value names should perform more strongly,” the MCA client report says. “We have already seen this start to play out since November last year post-vaccine news, but we would point out that this dynamic still has a long way to run until the value spread catches up with the upward trend in PMI (the world Purchasing managers Index).”
The spread between value and growth stocks has historically been highly correlated with the level and change in the PMI and other growth indicators. As the spread narrows, as it has done in Australia and internationally since last November, value stocks typically outperform.
The report says: “COVID has been a hit to the real economy, whereas the GFC was much more a hit to the financial economy. This has had a bigger impact on earnings than it has on market levels. The unprecedented levels of Government stimulus have meant that market prices have remained strong throughout COVID, whilst earnings and dividends generally deteriorated.
“Our experience with managing high quality income focused strategies for over ten years has been that in an economic recovery, deeper-value stocks perform best first, and then the higher-quality income stocks will be strong performers as the market environment matures into that recovery.”
EPS and dividends per share (DPS) surprised on the upside in the six months under review. Their revisions show “an extremely positive skew,” indicating confidence the trend will continue. MCA says that then positive revisions had not been adequately reflected in market prices immediately following the announcements, but the manager believes this is probably explained by a strong run-up in the market before February.
In terms of industries, the best EPS surprises were found, on average, among banks and insurers, followed by resources and real estate. The strongest price reactions were among the banks and insurers.
Drilling further into the themes from the company reports, MCA says regional banks, such as Bendigo Bank (ASX:BEN), did well off the strength of the regions-versus-cities theme. Domestic consumer and business-focused companies, such as Nine Entertainment (ASX:NEC) and Seven West Media (ASX:SWM), are doing very well from digital assets, subscriber growth and stronger-than-expected advertising spending.
There is also a strong ESG theme impacting results for companies exposed to coal, petrol refining, and electricity generation related to coal and gas, such as Coronado Global Resources (ASX:CRN), Origin Energy (ASX:ORG) and Viva Energy (ASX:VEA). Each of these companies had weak EPS outlooks and price reactions.
The MCA report concludes: “We are excited by the economic recovery, and what it means for our portfolios going forward. Based on our top-down analysis, fundamental views from our company engagements, and our big-picture work, the future does look more positive, and there are good opportunities for Australian companies to thrive in a post-COVID world.”
Note: Martin Currie is a sponsor of Investor Strategy News, which is a sister publication of Inside Investor and Inside Adviser. The views expressed are those of the author and not necessarily those of Martin Currie.