The average growth in earnings per share in the reporting season that starts this week will be a modest 3.9 per cent, with most of the growth coming from the resources sector.
Macquarie says this reporting season represents the “trough of the cycle” and it is forecasting EPS growth of 9.3 per cent in the 2019/20 year.
That is the consensus view on the results season about to unfold. Dermot Ryan, an Australian equities portfolio manager at AMP Capital agrees that the resources sector will drive earnings growth and apart from that sector “the reporting season could be somewhat disappointing.”
Ryan says: “We are seeing a number of downgrades coming through, particularly in the domestic-focused stocks in retail, building materials and sectors with large discretionary sending like automobile sales.
“Banks are confronting a difficult outlook. Dividends are facing cuts as increasing capital requirements reduce their equity returns at the same time as rapidly falling interest rates eat into their margins.”
He cautions that there could be some volatility as lofty valuations meet grim reality.
Morgan Stanley equity strategist Chris Nichol told the ABC: “The earnings pulse has been weak.”
Macquarie says the outstanding sector will be resources, with the average EPS growth for the sector forecast to be 28.9 per cent. A large part of that rise is coming from high iron ore prices flowing through to the earnings of BHP, Rio Tinto and Fortescue Metals – all of which Macquarie rates ‘outperform’.
Macquarie is forecasting continued earnings growth in the resources sector, with EPS growth of 22 per cent in 2019/20. It says most of the growth in 2018/19 came from the big miners but smaller resources companies will pick up in 2019/20.
Macquarie expects banks to report a fall of 6.9 per cent in earnings per share. This follows a fall 4.2 per cent in 2017/18. Things don’t look like picking up much in 2019/20, with sector EPS expected to grow by just 0.7 per cent.
However, it expects “modest upgrades” in the year ahead as an improving housing market supports the domestic economy and leads to higher credit growth.
It has ‘outperform’ ratings on mortgage broker AFG and mortgage insurer Genworth.
The outstanding sector in 2018/19, in terms of share price performance, was listed property trusts (A-REITs). Macquarie is forecasting EPS growth of 4 per cent for 2018/19 and 3.6 per cent in 2019/20.
Stocks prices has benefited from lower bond yields (the bond poxy effect) but Macquarie notes a soft outlook for property easing and continued weak conditions in retail.
Macquarie is forecasting that industrial stocks will report a fall of 0.9 per cent in EPS, before recovering with growth of 8.4 per cent in 2019/20. It says average annual EPS growth for industrials has been close to zero over the past decade.
“It is no wonder then that Australian investors bid up companies expected to deliver sustainable growth.”
Industrial stocks that draw their income from overseas businesses are expcted to do better, with a forecast for EPS growth of 7.7 per cent.
Some of its ‘outperforms’ include a2 Milk, Treasury Wine Estates, retailer Lovisa, Domino’s Crown and auto parts maker ARB.