Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Resilient reporting season showing the growing quality gap
We’re more than halfway through corporate interim reporting season, with the remainder of companies due to post results over the next few weeks. While the reoccurring thematic seems to be inflation, according to Martin Currie Australia, “the big surprise is not the inflation itself, but the varying ability for companies to pass on these costs.”
Chief investment officer at Martin Currie, Reece Birtles, is confident this earnings season will turn out to be a good one, going by very early trends. He says, “While we are still at an early point in the season, so far, the reported results have been very positive. For earnings per share (EPS) 43% of companies have beaten the street’s (that is, market consensus) lead-in estimates, with just 23% surprising on the downside. Dividends per share (DPS) surprises have been more even.”
And it’s not just Martin Currie which is positive, but brokers across the board. Post-result forecast revisions by brokers have been just as positive, with 41% of stocks receiving upgrades versus only 23% with downgrades.
The over-riding theme this season has been the inflation thematic, which appears to be positively affecting major industries, which are faring well. Birtles says, “We see that the positive EPS revisions are being driven by one big theme – inflation.
“This is showing through in commodity prices, input cost pass-through, interest rates and insurance rates. Ahead of results, the market seemed to have many concerns about cost pressures, but what has really surprised from results is not the inflation itself, but the varying ability for companies to pass on these costs and work this benefit into their EPS.”
So far this reporting season, here are results of where inflation has flowed through:
The other thematic is wage inflation. Birtles has witnessed plenty of anecdotes of the impact of wage inflation. He says that “Commonwealth Bank stated that they already see 3% wage inflation in their customers’ salary accounts, which is why they now see a rate rise as early as June.
‘Skilled labour is also in extreme demand, and shortages are especially being seen in tech, cyber, and compliance.”
Companies that haven’t been able to pass-through rising costs as easily as others will struggle. Birtles says, “the defensive industrials look to be the most exposed to cost pressures and have had the worst EPS upgrades. Their revenue line is generally slower and less reactive, and widespread inflation is also likely to crimp their margins going forward.”
He lists the following stocks that are in areas of weakness, Cimic Group( ASX:CIM), Downer (ASX:DOW) and Boral (ASX:BLD). He is also concerned about “Companies that have a mismatch on COVID-19 disruptions or cost increases versus their ability to re-price – such as Inghams Group (ASX:ING) and Ansell (ASX:ANN).”
