The reporting season was mixed this year with FY16 largely in line with expectations, but FY17 being downgraded by 1.7%. The confession season in May had been unusually quiet with fewer negative surprises, which lulled the market into a false sense of security heading into the reporting season. The actual results produced a similar number of disappointments as per usual, but fewer positive surprises which left the market a little underwhelmed.
Large companies look notionally cheap and offer good yields, but in our view reporting season didn’t suggest much in the way of improvement in the earnings per share growth backdrop.
- Banks are under margin pressure as competition and political scrutiny increases. * General insurers are facing competition from new entrants and the cycle remains challenging. * Telstra faces an earnings hole and is reinvesting to improve its competitive position. * Food retailers continue to have a competitive market with price deflation. * The outlook for a market darling like CSL (ASX:CSL) looks a little more difficult in the short term. * However the outlook for resources looks a little better with costs coming out and improved balance sheets. If commodity prices were to hold then there is significant leverage. * From an investment perspective we think the issues above are now well known and are factored into market forecasts, and as a result some investment opportunities are presenting themselves.
The domestic economy has held up well. The consumer environment has been reasonable (unemployment and interest rates are low) although some players experienced a slowdown late in the year during the election cycle,
Despite fears on the housing market, the sentiment was generally positive with defaults on settlements lower than expected.
Key growth areas in the market
While large companies are generally struggling, we see a range of growth areas in the market. These include the following:
- Those companies exposed to an ageing population such as the hospital groups—Healthscope (ASX:HSO), Ramsay Health Care (ASX:RHC).
- Those companies offering Software as a Service (SaaS). There continues to be rapid growth in this area as companies look to outsource IT functions and utilise the efficiency benefits that arise from using the cloud to deliver their IT services. Companies such as IRESS (ASX:IRE), MYOB Group (ASX:MYO), Aconex (ASX:ACX) all displayed strong growth.
- Online market places continue to grow. Realestate. com.au (REA Group, ASX:REA), Domain (Fairfax Media, ASX:FXJ), SEEK (ASX:SEK), Carsales.com (ASX:CAR) continue to deliver strong growth and are reinvesting to drive further growth.
- Global leaders such as Brambles (ASX:BXB), Macquarie Group (ASX:MQG) and CSL ASX:CSL) that have products or services in demand across the globe. * We are expecting a bounce in infrastructure spending this year as government spending kicks in. A range of infrastructure companies highlighted an increase in their workbooks and for our portfolios Lendlease (ASX:LLC) highlighted the strong growth expected in this regard.
- The lower A$ means a range of sectors like tourism, agriculture and export services continue to grow.
- There are also opportunities for companies in traditional industries that invest in technology to drive improved productivity. Significant investment in digitisation is being undertaken by large companies like AGL Energy (ASX:AGL), Tatts Group (ASX:TTS), banks and Telstra Corporation (ASX:TLS) with the aim of driving stronger customer engagement and more efficient service delivery.
Please do not hesitate to contact me should you wish to discuss anything in greater detail.