Aussie stocks get the post-earnings blues Aussie stocks get the post-earnings blues Aussie stocks get the post-earnings blues

Aussie stocks get the post-earnings blues

Last week saw the Australian S&P/ASX 200 index lose 2.8% of its value despite a weaker AUD and the strongest GDP print in six years. On Monday, the index posted its eighth straight day of losses, closing 3.31% down from the highs reached at the end of August. More than eight days of losses would have been a very rare event; since 2000 this has only occurred once, in 2008.

Following five months of gains, the eight-day selloff generated widespread negativity but it is important to put these losses in perspective as the last close on the ASX200 is still 7.4% above the same time last year. 
S&P/ASX 200
Source: Bloomberg
Reporting season was respectable given a low-inflation environment in which stagnant wage growth persists in Australia; positive surprises outweighed negative ones and more than 60% of reporting firms either beat or met expectations, with the majority of companies growing profits from the year before. 

The earnings season didn’t, however, have a standout directional trend and it didn’t deliver enough return to bring about a broad upgrade cycle on the index. The chart below from JP Morgan illustrates that the top P/E quintile of stocks on the ASX200 expanded their P/E multiples by 4.2x, illustrating that the majority of gains were delivered through valuation upgrades rather than earnings expansion. 
P/E
Source: Saxo Bank
This resulted in the external and domestic pressures converging and weighing down the market. Without earnings expansion, it is hard for the index to push higher given the risks lurking on the sidelines such as global desynchronisation of growth, trade fears, emerging market contagion risk, and flat domestic retail sales, heavily indebted consumers, political ructions, and a sliding housing market. 

Where to now? The ASX200 is now trading at 16.97x current earnings which is reasonable compared to an average P/E of 18.97x forward earnings. September is historically a volatile month for equity markets, since both the Dow Jones and the SP500 have fallen -0.7% and -0.5% on average respectively. If historical relationships replay themselves, this month could bring some choppy trading for the Aussie equity market.
S&P/ASX historical P/E ratio
S&P/ASX historical P/E ratio (source: Bloomberg)
Keeping that in mind, there are other factors in play in the Aussie market which could fuel September blues. The drought has hit agricultural stocks with rising grain prices putting pressure on businesses such as Nufarm and Inghams due to higher costs. Elders have also cited that retail earnings had been affected by “unseasonally dry conditions across many parts of Australia”; Ruralco have also put out a similar warning. 

Both firms, however, have also stated that increased sheep and wool prices have offset those pressures. 

Australian banks have been faced with increasing funding pressures due to the BBSW remaining persistently higher than the OIS rate. Despite the official Reserve Bank cash rate remaining on hold at 1.5%, the bank bill swap rate has risen more than 40 basis points in recent months (equivalent to 1.6 25bps rate hikes). For the past 10 years the gap between the official RBA cash rate and the BBSW has been close to 18bps, but it is now closer to 40bps.

As we have previously noted, rising funding costs pressure net interest margins and erode bank profits which could force lenders to raise rates. Since that article was published, the majority of smaller lenders have responded to tightening money markets and increased funding costs by raising rates by up to 40bps. Of the big four banks, all except NAB have raised their variable mortgage rates – Westpac by 0.14 percentage points, Commonwealth by 0.15, and ANZ by 0.16. 

The big four have increased their rates enough to protect profits, but not enough to materially increase them. According to Bloomberg, Westpac will recover only about half of the 11bps drop reported in its Net Interest Margins during the three months to June 30. Moving forward, there is significant risk that further out-of-cycle rate rises could be in play as the BBSW-OIS spread may widen with the Federal Reserve continuing to hike rates in the US. 

Australian banks also face other pressures. The housing market slide reduces investor demand for credit and significant regulatory risks remain post- the Royal Commission heading into the federal elections next year. 

The out-of-cycle rate rises from Aussie banks put pressure on central bank stimulus as 80% of Australian households carry floating rate debt at record levels of 200% of disposable income. The increase in home loan rates and fall in the housing market will put pressure on consumer spending, thus challenging Australia’s growth outlook as household consumption accounts for 60% of GDP growth. The pressure on the consumer could trickle into stocks in the Consumer Discretionary sector, particularly retailers.

Finally, the political climate in Australia has potential to put pressure on Aussie equity markets as well. The Consumer Sentiment Index fell by 3% today and on Tuesday, Business Confidence hit a two-year low, likely affected by the leadership spill in late August and the ongoing policy paralysis that features heavily in Australian politics. Following the ousting of Malcolm Turnbull, the likelihood of a Labour government has significantly increased with equity market returns historically being an issue under a Labour government, according to Bloomberg data.
Aussie stocks
Source: Bloomberg
Opportunities 
It is not all doom and gloom for the ASX 200 – opportunities still exist. Year-to-date, the Aussie dollar has fallen 8.75% against the greenback. Looking ahead, the Aussie will likely remain under pressure as the interest rate differential between the US/AUS heads into negative territory on the Fed continuing to hike rates while the Reserve Bank of Australia remains on hold. 

The Fed is on track to hike rates again this month while the RBA is likely on hold until 2020. The Aussie is also seen as a risk proxy with a deep and liquid market, so a trade war bet opportunity is there for the taking with the Aussie seen as a risk proxy for China. This opens up opportunities in the equity market for companies with exposure to US dollar earnings. Companies with greater than 50% exposure to the US by percentage revenue segment as reported annually include Mayne Pharma, James Hardie, Appen, Reliance Worldwide, Resmed, Boral, and Orora.
ASX performance by sector
S&P/ASX 200 performance by sector (source: Bloomberg)
Aussie tech stocks have been among the best performing stocks on the ASX 200 throughout the past year. The information technology sector outperformed the miners, the financials, and the index itself, returning 36% in the past year. As previously highlighted, WAAX as a basket could be a welcome addition to a diversified portfolio.

The technology sector has significant upside potential in growth terms. Whie execution risk certainly is a factor, Wisetech, Appen, Altium and Xero are high-quality businesses and continue to have the ability to grow revenues with attractive margins, thus presenting opportunities. Given the high multiples some of these stocks trade on there is a significant risk of a re-rating occurring across the broader sector, but for the companies with long-term growth runways this will present a buying opportunity. 

With this is in mind it is prudent to monitor the weighting of high-growth/high P/E stocks within your portfolio; investing in quality will always deliver but monitoring the price you pay for quality is important to protect returns.

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.