For investment manager Reece Birtles, the bullish takeout from around 160 S&P/ASX companies reporting their December half results was a broad-based increase in sales.
Birtles, who is Martin Currie Australia’s chief investment officer, said 38 per cent of companies reported “sales surprises” above analysts’ consensus expectations. And in their outlook commentaries 27 per cent of companies revised their sales expectations upwards by more than 2 percent.
“Our view is that these sales beats are sustainable and we think it is likely that earnings will continue to grow,” Birtles said.
One of the indicators he looks for is growth in free cash flow (operating cash flow less capex), which is “a good alpha indicator”.
“Free cash flow was a little weaker in the latest earnings reports. However, it was down because companies are investing more and it has been high for a number of years.
“Companies are increasing their capex and their working capital. This is good for the sustainability of the domestic economy.”
When it comes to the market outlook, Birtles said the combination of strong jobs growth and more labour market slack was a “sweet spot” for companies.
“We have got past the post-mining hangover. Housing is holding up.
“Market risk is elevated in the US because the earnings cycle is at a peak and wage inflation has re-emerged. In Australia earnings have not got back to pre-GFC levels and the market’s PE is lower than the US.”
Martin Currie’s Australian equity portfolios are overweight consumer discretionary and consumer staples stocks, non-bank financials and energy stocks. They are underweight banks, healthcare companies, property and materials stocks.
Over the 12 months to the end of December the Martin Currie Australia Value Equities composite was up 19.4 per cent, compared with an 11.8 per cent increase in the S&P/ASX 200 Accumulation Index.
Over three years Martin Currie Australian value equities are up 14.6 per cent a year, compared with the index return of 8.6 per cent.