Market Wrap

February is always an important month for the Australian stock market. It marks “reporting season” when listed companies release their results for the first half of the financial year and update guidance for the remainder of the year.

Following on from two strong calendar year performances from the market, in terms of price if not earnings growth, the reporting season took on added significance. To put it simply, without clear signs that an earnings recovery was beginning further gains for Australian equities in 2014 would be put in serious doubt.

The good news for the rest of this year is that on balance the reporting season should be looked upon favourably with market expectations for earnings growth in the full financial year 2014 slightly higher now, at 12% growth, than they were leading in to the beginning of February when they stood at 10.9%.

Reporting Season Highlights

The overall upgrade to earnings expectations (12.0% full year EPS growth from 10.9%) masked a mixed set of results across broad market sectors.

Resources broadly beat expectations driven by strong rises in volumes and cost control at the major diversified miners. The consensus is now that earnings will grow at 28.9% during the full year (up from pre reporting season expectations of 25.8%).

Industrials were a mixed bag but in aggregate modest expectations of EPS growth at 4.5% were further downgraded to 3.2%. Whilst revenues surprised on the upside at 3% growth for the first 6 months, margins disappointed. Clearly the impact of a lower dollar, record low interest rates and rising confidence has yet to be fully reflected in increased activity.

On a positive note several cyclical industrials which have endured tough times over recent years beat pessimistic market consensus views and saw strong upward price movements as a result. A prime example was Fairfax which was up 44% for the month. On the other hand high quality companies with strong market presence and which continue to deliver growth above and beyond expectations also performed well, two examples being online companies Seek and REA Group (RealEstate.com) which rose by 37.9% and 22.5% respectively for the month after delivering particularly good results.

On the other side of the ledger there were notable disappointments. Coca Cola Amatil ended the month down 3.3% after a large write down for its troubled SPC business led to an 82.5% fall in profits. Qantas saw its share price drop by almost 10% on the day it announced after tax losses of $235mln down from a profit of $109mln in the previous first half.

Financials saw decent upgrades of 2.1% to expectations with the market now looking for growth of 11.1% in FY14. The big driver of upgrades for the sector was the banks, where the better results generally came off the back of lower provisioning for bad and doubtful debts (BDD) rather than an improvement in credit growth.

When comparing the rate of growth in earnings across the range of market capitalisations (company value), large cap (blue chip) and mid cap companies saw upgrades whilst and small caps suffered net downgrades. The top 50 companies are now expected to grow earnings at a rate of 11.5%, the next 50 at 13.1%, whilst smaller companies from outside the top 100 are now expected to grow at 18.4%.

Performance Summary

The performance of the market in the month would certainly indicate a positive reaction to this year’s first half results. The broad market rose 4.9% during February. In fact this was the largest monthly gain since July 2013 and more than made up for a disappointing start to the year when January posted negative returns.

Have a good weekend, 

The team at IPS