As the half-year earnings season finishes up, Deutsche Bank analysts have crunched the numbers for an early resume.
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Deutsche's numbers are based on the 74 per cent of companies that had reported by midweek, accounting for 91 per cent of the ASX 200 index's market capitalisation.
Here are its key observations. illustrated by nine charts:
Downbeat results
Reporting season has been fairly disappointing, with only 48 per cent of the reporting companies managing to beat Deutsche's profit expectations for the December half. In recent years, more than half the companies had exceeded expectations, the bank says. Similarly, the proportion of companies that upgraded their earnings forecasts has been low compared with recent years (at 42 per cent).
Miners' cost cuts kick in
Looking at the actual extent of the rise in profit expectations is a little more encouraging, Deutsche says. Full-year profit forecasts across the market as a whole have been raised, not least thanks to the cost-cut programs at heavyweights BHP and Rio. Forecasts for banks and defensive industrials are little changed, while cyclical companies such as media and sellers of discretionary consumer goods have seen moderate downgrades.
There's growth outside of resources
More than half-way through this financial year, analysts expect mid-single-digit earnings growth for both industrials and banks. And while earnings are falling sharply for resources, stabilising commodity prices may give confidence that earnings have bottomed.
Volatility is on the rise
The past month has seen a rise in the volatility of stocks' daily share price movements. Deutsche says it's because share valuations are quite high: "A disappointing result/outlook is resulting in a de-rating of stocks back to more normal valuations. On the flip-side, companies that deliver on earnings are being viewed as a safe place to be."
Cost cutting
Companies' efforts to take out excess cost continue to bear fruit. The most obvious has been BHP and Rio Tinto's successful cost cuts, which have led to upgrades to pre-tax profit margin forecasts for FY15. Operating earnings (EBIT) are still expected to fall significantly, albeit at a lower rate than the market expected a month ago, even as sales forecasts have come down further.
Keeping investors happy
Dividends are continuing to grow solidly, as companies return cash to yield-hungry investors. For companies that have reported, dividends are expected to grow by 4 per cent this financial year, even as earnings fall by the same magnitude.
Where the growth is
Market earnings were flattish in the financial years 2012 and 2013, but perked up in the past fiscal year. This year looks set to bring back negligible earnings growth of just 2 per cent. The big drag on profits is coming from resources, where iron ore prices have pulled earnings down by nearly a quarter (the main impact of the oil rout still lies ahead). Outside of resources, earnings are quite reasonable, Deutsche says. Banks continue to grow profits in the 5 to 10 per cent range, credit growth is firm and bad debts remain low. And profit growth of industrials is at multi-year highs.
Cyclical stocks take off
Profit growth for defensive industrials such as consumer staples, healthcare and telcos has been particularly strong, at around 18 per cent over the previous corresponding period. A big swing in general insurance earnings has been particularly helpful, Deutsche notes. Earnings growth for cyclicals exceeds 10 per cent for the first time since 2010, though largely boosted by airlines which recovered from a damaging capacity war as oil prices plunged. Excluding airlines, profit growth is around 6 per cent.
ASX outperforms
Despite the overall softer tone of the results, the market has performed reasonably well, Deutsche concludes. The ASX200 has risen through February, and slightly outperformed global equities. It seems that simple evidence of some earnings bright spots is enough to support the market. Earnings that are generally heading higher give confidence that dividend forecasts will be met, making equity returns quite compelling compared to yields on bonds and term deposits.