Results season 2016: winners and losers
While company full-year results for the 2016 financial year were generally flat, there are signs that, when half-year results are released next February, this trend will have reversed.
According to AMP Capital economist Diana Mousina, around 42 per cent of the companies that reported their full-year results during the recent results season exceed market expectations.
“That's a bit below the average figure of 45 per cent of companies who generally exceed market expectations. It was certainly a challenging year for resource and energy stocks, but conditions in these sectors now look to be improving,” says Mousina.
“Stocks in these industries were some of the outperformers this reporting season because commodity prices have picked up so much over the past six months. Many of these businesses have also established much stricter cost control and supply-side disciplines, which has lead to an improvement in sales and earnings,” she explains.
Mousina notes that over the past year many industrial stocks have also experienced stymied revenue growth and ongoing cost-cutting, which has produced historically weak results from companies in this area.
“Across the banking sector, ongoing regulatory change and high dividends have constrained profit growth compared to the performance the banks have turned in over past few years,” she says.
Other sectors in which businesses have underperformed include telecommunications and healthcare. On a more positive note, a number of companies in the real estate and retail sectors performed above market expectations.
While there are signs of green shoots in the resources and energy sectors, Mousina says trading conditions remain difficult for many publically listed businesses.
“The outlook is still challenging. Although we have a relatively good economic backdrop in terms of GDP growth, we are still in the midst of a period of very low inflation, which means the ability to raise prices is constrained across a large number of industry sectors,” says Mousina.
“But we remain positive on the outlook for businesses in the resource and energy sectors, because the improvement in commodity prices has been so positive for businesses in these two industries. If this improvement in commodity prices continues, it should be reflected in stock prices for businesses in these sectors. It’s worth noting, however, performance is coming from a very low base in terms of overall profit, but the momentum is there,” she adds.
Mousina notes across the industrial sector, businesses are preparing for expansion, which is why many management teams now have a more optimistic profit outlook.
“But overall, the outlook position companies held at the beginning of the year was consistently too optimistic. There's a risk of this happening again because businesses are expecting positive earnings growth next year. We have been disappointed over the last few years because price growth has been below expectations. There's also still quite varied demand across the sectors, which could lead to another flat result next reporting season,” she adds.
Rate cut impact
One variable that could impact company performance on the upside is the recent cut to the cash rate. Mousina says it’s difficult to predict what if any long-term impact this will have on company performance.
“It can take a while for rate cuts or hikes to flow through into the economy. But generally, rate cuts should be positive for the retail sector. Certainly, the retail sector performed reasonably well during the most recent reporting season,” says Mousina.
“Another rate cut would be positive for retailers. But we are getting to a stage now where interest rates have been cut so much the effect of any future cuts may be muted. Business performance, and confidence, does not usually respond directly to changes in interest rates. This is in contrast to the way consumers respond after a rate cut, when positive momentum can generally be seen. But the risk is that any future rate cuts might negatively impact consumer sentiment,” she suggests.
According to Mousina, the key for SMSF investors is around dividend payments local companies distribute to shareholders.
“In the current reporting season, about 86 per cent of companies increased or maintained their dividend. That's a really important source of yield for investors at a time when there's plenty of market uncertainty,” she says.
As ever, it pays for SMSF investors to keep a constant watch on market and company performance, and take this into consideration when planning their SMSF investment strategy.