How much you can read into this is questionable; Australia’s analysts (a much smaller group than a decade ago) were working with little formal guidance. But Schellbach says the market has generally underestimated how resilient Australia’s biggest companies would remain in fiscal 2022.
But optimism about 2023 evaporated as earnings season progressed.
Where profits are up an impressive 22 percent in 2022, thanks in large part to strong gains from the mining and energy sectors, the consensus says they’ll rise 7 percent in 2023, and Schellbach expects that to weaken to As the year progresses and rates increase. economies around the world are beginning to slow down.
On that cautious note, here are five things we learned from reporting season.
The economy is in a twilight zone
The big challenge for investors is that the economic conditions that drove the 2022 numbers and even the trading updates for the first six weeks of 2023 are likely to be very different than conditions six months from now.
The gains in commodity prices enjoyed by miners in the first half of this year have been partially reversed. The strong consumer spending that retailers have experienced (driven by inflation) shows no signs of abating at the moment, but that will happen as rates continue to rise. Industrial companies will see a variety of pressures as the economy begins to slow.
Labor shortages could affect profits in two ways
One of the strongest complaints from CEOs during the reporting season was labor shortages. As the Jobs and Skills Summit in Canberra on Thursday and Friday will show, this is not a problem that will be easily solved.
Many believe Australia’s low unemployment rate will make the economy more resilient as wages rise, but logic says it could deliver a double whammy to profits in terms of lost revenue and higher costs.
The first is difficult to quantify, but the second is worrying: the slowdown in demand will affect revenues and the ability of companies to pass on higher prices; but stubbornly low unemployment will keep pressure on wages in the long run. Profitability simply has to be squeezed from both sides.
Pricing power is strong, for now
Earnings pressure is coming, but reporting season didn’t provide many clues as to when.
Indeed, one of the constant themes was the apparent ease with which companies passed on higher prices to protect their margins, and their plans to continue to do so.
But as the economy slows, a gap is likely to open between those with real pricing power and those who have been able to push prices higher while the economy was strong.
Industry structure matters. General insurers like IAG, Suncorp and QBE, for example, which dominate a relatively concentrated industry, are well placed to continue to raise premiums. Dominant ranked players like Carsales, REA Group and Domain, or retailers like JB Hi-Fi, should be equally well placed.
But a company that manufactures commodity construction products or packaging might find that its ability to pass on rising labor and raw material costs is much more limited.
Investors need to think carefully about their haves and have-nots.
We have to look beyond the index
Market indices such as the ASX 200 and S&The P500s are helpful in telling a story about the market in general, but reporting season has provided a reminder of just how many speeds the economy is moving right now: the housing sector looks very different than the energy sector. , which looks different from the banking sector, which looks different from the retail sector, which looks different from the technology sector.
Yes, this is always true to some extent. But in a world with higher inflation and higher interest rates, disparities between sectors and between companies within sectors appear to be widening. Buying the index and tune out the noise might not deliver the easy, consistent returns we’ve seen over the last few decades.
The best CEOs are thinking three moves ahead
After three years of incredible change and drama, it’s only natural that many CEOs are more focused on the tactics of operating through uncertainty, rather than the overall strategy that will drive shareholder returns for the next five years and beyond. .
But the best CEOs haven’t lost sight of their broader strategy, whether it’s Commonwealth Bank building its financial ecosystem, BHP or Rio Tinto investing in projects that won’t pay off for a decade, or CSL continuing to pour hundreds of millions dollars in R&d
CSL boss Paul Perreault perhaps sums it up best: “If you were worried about fiscal year 2023 in terms of delivering on what we’re going to do, then you shouldn’t be sitting in this chair, to be honest. This is a long-time business: I have to think about it 10 years from now because no one else is doing it.”
Not all businesses are CSLs, of course, but the difference between tactics and strategies in an individual company, and the priority the CEO gives them, is something investors should consider at the end of reporting season.