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Downgrades dominate post reporting season


T. Rowe Price ‘s head of Australian equities, Randal Jenneke, provided investors with his insights and market outlook as restrictions look to ease over the coming few weeks, reporting season drifts back into the rear-vision mirror and investors look to capture upside potential from the reopening.

  • And as expected, the lockdowns in Melbourne and Sydney have had a negative impact on company earnings and outlook statements. Jenneke says, “We saw roughly twice as many downgrades as upgrades for FY22 earnings growth estimates. This was a big shift from half-year results, which was one of the best from an earnings versus upgrades perspective in decades.”

    Fortunately for T.Rowe Price, its portfolio was well-positioned to capture most of the upside this reporting season and things largely went well. Jenneke highlights the shift “away from domestic cyclicals and more towards higher-quality defensive businesses, reflecting our concerns about slowing growth, rising earnings risks, high valuations, and diminishing government and central bank support for markets.”

    “We still believe there is the very real prospect of a 5%-10% market correction before the year is out. The recent dramatic fall in the iron ore price is a good example of our concerns,” says Jenneke. And his projection makes sense. Despite the recent dip, the S&P/ASX 200 Index is still up 26.73 per cent over the last 52 weeks and up 11.28 per cent year to date. Markets have been running hot and any change in interest rates or global liquidity as markets come out of lockdown will see a re-rating quite quick.

    Jenneke warns that “tapering is coming and the credit impulse of the world’s three largest economies is already negative. Combined with earnings growth sliding into downgrade territory still-elevated P/E dispersion, we are likely to see investors become ever-more-focused on stock fundamentals.”

    So, what is next on the cards?

    The next big round of company-sensitive trading updates will be delivered during AGM season. The majority of AGMs occur between September 2020 and January 2021. Key themes will be:

    • Accountability from boards’ response to the effects of COVID-19 on the company.
    • Increased strikes on remuneration reports by shareholders.
    • Company focus on environmental, social and governance (ESG) issues
    • An improvement in gender diversity.

    Jenneke concludes by saying, “We believe these updates are more likely to disappoint overly rosy market expectations. Earnings downgrade cycles come in waves………only the first one has broken.”

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