As we head into earnings season, there are 7 key macro influences that you should be aware of because they will significantly influence profit results and earnings outlooks. These influences include falling energy costs and slowing wages growth.
But how honest will companies be about their impact?
Australian companies are facing a number of macro ‘tailwinds’ that benefit earnings, and macro ‘headwinds’ that could hurt earnings. Those macro factors — and there have been lots recently — are obviously outside the control of management.
But we want to see some integrity in the presentation of results, with companies being honest about how macro factors affected their performance and outlook.
Companies are often keen to come up with excuses when they’re hit by headwinds; but they tend to be lax when it comes to outlining how they won from factors such as the falling $A and lower operating costs.
Will companies acknowledge some of those trends which have occurred and look likely to continue?
We want shareholders to be able to clearly differentiate between how companies’ performance was due to management decisions and how it was due to macro changes.
The 7 major macro trends you need to know
1. Low energy and fuel prices
Some high energy users such as big transport companies and big retailers are benefiting from the likes of lower fuel costs. Operating costs have come down, but the market seems to have ignored this. Lower costs could offset some margin compression from other sources, or boost margins themselves. But it probably won’t be flagged by companies.
2. Slowing wages growth
Figure 1. Slowing Australian wage growth (wage price index)
Source: ABS, RBA
Some companies will be benefiting from the slowest wages growth of the last 20 years. That will particularly help high-employment industries such as financial services and retailers.
3. Record-low interest rates
Figure 2. Australian cash rate
That’s benefiting the likes of property trusts which are seeing capitalisation rate compression which is pushing up the price of property.* Low interest rates are also stimulating demand for credit, which helps financial services companies. Highly geared companies are also benefiting from the lower cost of debt.
4. Inbound tourism
There has been a strong increase in inbound tourism over the past 12 months, particularly from China. As we’ve highlighted in the past, the Budget papers showed that Chinese inbound visitors/tourists have doubled in the last 3 years. The run rate is now approaching an astonishing 1 million per annum, which will particularly benefit the likes of tourism and hospitality operators.
5. Surging housing and construction
The increase in housing starts benefits the financial sector providing credit, but it also boosts discretionary retailers providing furnishings for new dwellings.
6. Weakening $A
Some Australian companies will win from the falling $A, particularly those who earn a significant proportion of their earnings in $US such as Westfield Corporation and CSL Limited. Some internationally exposed companies like Crown, Computershare and Seek should also get an uplift.
7. Weakening commodity prices
Figure 3. Bulk commodity prices
Source: ABS, Bloomberg, IHS, RBA
Obviously there are headwinds. The major headwind is the slump in commodity prices such as iron ore. But coal, gas and oil producing companies will also be in pain.
We will be watching closely to see how companies comment on these macro trends in their forward statements: does business see commodity and energy prices being sustained into this financial year?
We particularly want to see any indication of a boost in the level of investment back into businesses, as opposed to acquisitions.
We’re already seeing earnings expectations tapered for 2016 and this is consistent with sober business investment intentions. Indeed. we expect to see Australian companies (outside the winners from a falling $A) to continue to forecast low reinvestment intentions.
* The capitalisation rate (cap rate) is effectively a property’s return on an all-cash purchase (or the net operating income divided by the total value of the property). Cap rate compression is indicative of lower market yields on property. Effectively market values rise faster than rents and so yields fall.