FIVE THINGS WE LEARNT FROM THE AUSTRALIAN EARNINGS SEASON
Grant Cotty, September 2022
We are now through earnings season, the period where most Australian companies report their results for the year ended 30 June.
Investors are always interested in the results to determine how companies are performing, but this year there was even more scrutiny.
With significant forces at work in the global and Australian economies, investors were watching to see how companies were impacted and for any clues about how conditions are changing.
Market conditions have moved a long way since the Reserve Bank of Australia started lifting the cash rate in May.
The cash rate is up 2.25 percentage points and is set to tighten further, with the futures market pricing in about another 0.85 percentage points of hikes over the remainder of the year.
Inflation is currently running hot in Australia at 6.1%.
The key question remains: how much will inflation and interest rates impact consumers, businesses and the economy?
We have five key takeaways from this earnings season.
1) Earnings were better than expected
Last year was strong. Earnings season turned out to be largely a non-event with minimal signs of a slowing economy in results.
Consumers seem to have been propped up by elevated savings accumulated during the pandemic and are currently weathering higher interest rates and inflation.
2) The impact of higher interest rates hasn’t really hit Australia yet
Commonwealth Bank of Australia CEO Matt Comyn, talked about the impact of rising rates when the bank reported.
He reminded the market that it takes a while for higher rates to work through the system saying, “the effects … have not yet fully been felt”.
Rate rises that have already taken place (excluding this week’s 0.50%) are expected to impact the mortgages holder four times as much in December as they did in July.
CBA expects the impact to be equivalent to 1.5% of GDP.
3) Next year is expected to be tougher
The number of companies with downgrades to next year’s expected earnings comfortably outstripped those with upgrades (over twice as much).
It’s no wonder given the cocktail of costs, including wages and higher interest expenses, which could weigh over the next twelve months.
4) Higher dividends were well received
This earnings season, investors welcomed some extra dividends over and above what they were expecting. Conversely, stocks that were a bit stingy with their dividends didn’t perform as well.
This was aptly demonstrated by the positive reaction to BHP’s higher-than-expected dividend and the weakness in Rio Tinto’s share price following its cautious payout.
5) Australia is still the lucky country
Australia has fared better than many countries in this period of instability.
This reporting season had a few reminders of what it means to be the lucky country.
BHP asserted its total economic contribution including employees, suppliers, communities, governments and shareholders totalled US$78.1 billion.
It paid around A$19bn in taxes to state and federal governments and is expected to contribute around 10% of all federal taxes in Australia.
It sure is nice to have a bevvy of miners, flush with cash, to help add ballast to your economy.