Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
The week ahead is a blockbuster one for earnings in Australia and with current valuations on the ASX looking stretched, upside surprises are likely to come from companies that benefit from the weaker AUD, supportive commodity prices, and US-driven growth.
The key themes for investors to watch will be the USD earners and companies exposed to strong US growth; growth stocks with high PE ratios priced to perfection must deliver both on forward outlooks and meeting expectations, as well as capital management given Australians' love affair with dividends.
Below are some potential market movers for the week ahead.
This week Dominos reports, and despite the market expecting the firm to miss FY'18 growth targets, a miss would still be disappointing. A downgrade to FY'19 growth momentum guidance is also likely which could disappoint investors. However, Dominos does have a high level of short interest, so in the event of a positive surprise there is risk of a rally as short sellers cover their positions.
The US has been a clear outperformer on the global macro stage in terms of growth and record low unemployment. The fiscal stimulus has the US economy running on a sugar high and this, along with the currency exposure, is likely to present positive tailwinds for Bluescope Steel next week.
CSL is a great Australian success story, both domestically and internationally, and it reports on Wednesday, a bumper day for companies reporting. For the past two years, CSL has missed earnings expectations. CSL is trading at a price to earnings ratio of 34x forward earnings, well above comparable companies and its own historical average. With market expectations so high the onus is on CSL to deliver, and there is a risk that increased capital spending dampens FY'19 earnings guidance. While we don’t doubt that CSL is a quality Australian company with the capability to grow earnings, the high valuation does not leave any margin for safety when it comes to reporting.
Cochlear, another stock reporting this week, has also been flagged by the market as a high growth stock, with a heightened valuation. As we have seen with Facebook and Twitter suffering sharp revaluations on missed expectations, we could see sharp falls in the share price on the day if expectations are missed.
Wesfarmers also report on super Wednesday; the Bloomberg consensus forecast for FY'18 EBIT is A$4,218, we expect the figure to come up slightly below this estimate due to falling earnings from Coles and the Industrials division of the business.
IAG repors Wednesday as well, which is the biggest day of reporting season by market capitalisation. IAG are likely to report an upgraded FY'19 outlook due to advantageous weather conditions. This may provide an upside surprise over analyst estimates. IAG could also announce a buyback given its favourable capital position.
QBE reports on Thursday and like IAG, the reasonably stable weather conditions could reduce natural hazard losses. Given guidance is skewed to the downside, the market could take a positive report favourably.