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.
Value, dividend recovery after strong earnings season: Morningstar
Reporting season is over. Companies are cashed up following what was a stronger-than-expected interim earnings season despite facing a myriad of uncertainty-ridden events such as the lockdowns, restrictions and border closures, supply chain constraints, rising inflation and the war in Ukraine. While 2021 was generally a positive year, the outlook for 2022 is mired in geopolitical chaos and rising inflation.
Morningstar’s Peter Warnes has released the ‘Earnings Season Insights’ report which looks at the highlights from this year’s interims. He says, “Most companies experienced disruption from supply chain issues and labour constraints. Cost inflation was commonplace, but stringent cost control measures and price increases generally limited damage to margins. Obviously, tourism, leisure and hospitality sectors were adversely affected. Outlook statements were naturally cautious and preceded the Russian invasion of Ukraine.”
“Reflecting widespread uncertainty in 2021, earnings estimates for FY22 have been upgraded in low single-digits. Upgrades were evident in the commodity-related and financial sectors offset by relatively smaller downgrades in industrials. Operating margins declined modestly, although retailers did report meaningful increases in COVID-19-related costs becoming increasingly embedded in cost structures, with margins suffering accordingly. Balance sheets are strong,” he adds.
Cashed-up companies have started to pay out fat dividends and shareholders are being rewarded. The total dividends for ASX-listed companies in 2021 is estimated to hit $87bn with the iron ore giants BHP and RIO paying ordinary and special fully franked dividends to the tune of US$34.5bn. Banks and oil companies that are in recovery mode had also joined in during the December half.
Warnes then touched on the energy sector, commenting: “Upgrades were most common in the energy sector with oil, gas and LNG prices escalating while both thermal and coking (steelmaking) coal companies were also upgraded as supply issues pushed prices to record levels despite widespread ESG concerns. The lack of investment and natural reserve depletion continues to constrain oil supply, which is only exacerbated by the recent Russian invasion of Ukraine.”
The war in Ukraine is a major humanitarian disaster that Warnes feels will have much wider implications than the market is expecting. He says, “Supply-chain issues will lengthen considerably and could disrupt the global economy for years. Europe is a critical cog in the global economy and recession is very possible.
“It is unlikely business investment will increase meaningfully given the level of uncertainty. A debt-laden government is also likely to keep a cap on expenditure reducing the influence of public demand on GDP growth. Material shortages will continue to restrict residential construction activity.”
Australian GDP growth of 4% plus is widely forecast, but it could disappoint, he warns. “The Reserve Bank’s central scenario forecasts GDP growth of 4.25% for 2022, halving to 2.0% in 2023 and well below the long-term average. The possibility of stagflation, rising prices and falling growth is very real,” he says.
Companies are hesitant to raise wages and inflationary pressures are building with a possible rate rise just around the corner. All this is putting added pressure on household consumption and discretionary spending.
In summary, the overall positive bias was evident in the Initial Market Reactions (IMR) of companies with the strongly positive readings easily beating the negatives 30/21. AVITA Medical had the highest IMR with a 25.7 per cent rise in its share price followed by Magellan Financial Group (ASX:MFG) which rose 18.5 per cent.
