Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Markets don’t share in sober outlook for corporate earnings
The outlook for the corporate earnings season this August may be less positive than the stock market is pricing in, with some commentators warning that slowing consumer spending and falling commodity prices are likely to dampen profit growth.
Morningstar’s Australian head of equities research Peter Warnes says the outlook for the 2023-24 fiscal year is for moderating corporate profit growth across sectors, but especially those focussed on consumer sales.
“The outlook for household consumption, the largest contributor to GDP, is the major influencing factor,” Warnes says in a new report on the Australian equity market outlook for the third quarter. “Interest rate hikes and the refinancing of ultra-low fixed rates will meaningfully reduce the disposable income of indebted households.
“Growth in household consumption of less than 0.5 per cent in both 2023 and below 1 per cent in 2024 is forecast,” he adds, noting that a negative reading is likely in the first half of 2024. Warnes anticipates a recession in household consumption and GDP in both 2023 and 2024.
“Earnings may decline in many cases as household consumption growth stalls. It could well contract in the current half to December 2023. We expect a subdued market in this quarter, although July is a traditionally stronger month as funds are allocated for the new financial year.”
Diana Mousina, deputy chief economist at AMP Australia, says mining companies have seen some of the largest downgrades for 2023 earnings of all listed companies, along with real estate companies, consumer discretionary and energy firms. For banks, the pressure may be on earnings, too, given high levels of competition and lower mortgage volumes.
“Some companies have already been guiding the market lower over the past month or so, particularly in the consumer discretionary space, so earnings estimates already look to be going down and there is likely to be a few more downgrades in August this year compared to last, given the weakening in the economy in 2023,” Mousina said.
Miners earnings drop as commodity prices fall
Recent data from the Australian Bureau of Statistics (ABS) reveals the mining industry experienced the largest fall in business turnover of 13 selected industries in May.
“Mining turnover fell 6 per cent in May, following a 12.1 per cent fall in April, as demand and prices for commodities such as iron ore and coal come off recent highs,” said Robert Ewing, ABS head of business indicators. Through the year to May, mining turnover posted the largest drop in annual turnover since August 2020.
Warnes expects commodity prices to continue to fall from their elevated 2022 levels. While commodity prices are generally lower in 2023, they remain relatively high compared with historical levels.
“We generally expect prices to fall toward the marginal cost of production longer-term, which seems broadly in line with market expectations on average, though the assumptions for individual commodities will vary,” Warnes said.
“Longer-term, we think demand from China is likely to moderate as consumption drives economic growth at the expense of investment, allowing iron ore and copper prices to trade closer to the cost of production,” he said.
Positioning defensively for a downturn
Research from Innova Asset Management shows that during market downturns and recessions, healthcare provided the greatest earnings and margin resilience, followed by consumer staples. Earnings in the energy sector remained strong as well, and information technology is more resilient than many had thought, ranking closely behind defensive sectors.
“However, on average, we see earnings in recessions fall around 15 per cent to 20 per cent,” Innova managing director Dan Miles (pictured) said.
“When we look at equity markets across the developed world, we see earnings expectations for the next 12 months, depending on the method used, being roughly flat to down 1 per cent, with Australia down a bit more than that,” he added, though he noted the US is forecast to rebound to about 27 per cent by 2024.
“If there is a good chance of recession, which there is, and that isn’t in equity market prices, which it’s not, then you aren’t being paid to be 100 per cent bullish on stocks – so don’t be,” Miles said.
“We aren’t predicting a GFC-type recession where corporate earnings fell some 70 per cent-plus; we’re not even forecasting recession. We’re saying the risk of recession is high, but it isn’t in equity market pricing,” he added. “Maybe we’ll be lucky this time, and Chinese fiscal stimulus will pull us through without a recession – but we doubt equity markets will go unscathed.”
