Key Points: 

  • Investors need to keep in mind that reporting season in Australia is occurring at a significant turning point in the global economic cycle. Cost pressures have been well understood and there were not too many misses solely on underestimated costs. However, the outlook for earnings has considerable downside risk in our view. Some management teams addressed this by withholding guidance, but others tried to comfort investors by trumpeting how resilient their businesses will be to further costs and higher rates.
  • Communication services, Real estate, Consumer staples, Industrials and Energy provided the upside surprise in FY22. Utilities, Materials and Consumer Discretionary saw their fair share of misses. Retail saw a positive earnings surprise and JBH said the start to FY23 had been positive. In our view, the high household savings rate means the consumer will likely be relatively resilient to the start of the tightening cycle by the RBA, but ultimately this will wane as interest rates rise.
  • The CBA result highlighted the strength of the economy prior to the interest rate rises. However, management indicated housing and business lending growth will likely slow. The impact of slower lending growth on earnings will be offset by an increasing net interest margin as interest rates rise. REA’s management team thinks it will be resilient to the property downturn because agents finding it more difficult to sell properties will be drawn to their platform. This may the situation now, but ultimately higher interest rates will lower transaction volumes.
  • Global cyclicals with market power such as BXB and AMC have shown that costs can be passed on. Clever structuring of contract terms and a strong market position have allowed WOR to pass on costs and hire new staff in a globally tight jobs market. The business is benefitting from higher oil prices in the short-term, but also the longer-term shift to renewables.
  • Japan and Australia have been our preferred equity markets for the past year as the US yield curve has flattened and inverted. Key US business surveys are also signaling a US recession is brewing. We will update our TAA/DAA outlook next week and plan to move further underweight in risk assets.
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