The economic backdrop
As the dust settles onAustralia's latest reporting season, businesses across the nation are grappling with the harsh realities of reduced consumer spending and soaring expenses. This seismic shift comes in the wake of the most aggressive monetary policy tightening witnessed in decades, courtesy of the Reserve Bank's swift actions.
These revelations unfold against a backdrop of unprecedented macroeconomic instability, characterised by a surge in government bond yields. The resulting financial constraints and elevated capital costs are putting immense pressure on corporations, as central banks worldwide battle against higher inflation rates.
In China, the property and shadow banking sectors are mired in crisis, casting a long shadow over global commodity prices. This, in turn, has sent shockwaves through the Australian stock market, causing the benchmark S&P/ASX 200 index to decline of 1.4% throughout the month of August.
Reporting season
As of August 30th, 2023, a total of 155 out of the ASX 200 companies have released their financial reports for either the full fiscal year ending in June 2023 (131 companies) or their half-year results (24 companies).
When focusing exclusively on the full-year financial results, there was an 8.9% increase in overall revenue during the specified period. However, expenses concurrently surged by 13.9%, resulting in a substantial decline of 42.9% in net statutory profit.
Earnings per share experienced a notable decrease of 27.7%, while dividends also witnessed a reduction of 2.5%. Furthermore, the cash reserves of these companies saw a decline of 9.7%, reaching a total of $199.2 billion.
76% Full year reporting companies reported a rise in revenues, whereas 86% reported a rise in expenses. Profits rose for 40% of companies and fell for 60% of the reporting companies. 84% of companies issued a profit while 16% recorded a statutory loss.
The combined sum of dividends slated for distribution amounts to $34.5billion ($29.1 billion for entities reporting on an annual basis), marking a decrease from the $42.3 billion disbursed in the preceding year. 87% of companies paid a dividend (average 85.1%), 47% of companies lifted dividends while 26% cut dividends and 14% maintained dividends while 13% didn’t pay a dividend. 56% of companies lifted cash holdings while 44% cut cash.
Total cash holdings of all ASX 200 companies on June 30 were $228bn, down $26bn or 10% over the year.
FN Arena says that 31.5% of 295 companies tracked (ASX 200 and ASX 300) beat market forecasts; 116 companies (39.3%) had results in line with forecasts and 86 companies (29.2%) missed or fell short of analyst expectations. That means a beat/miss ratio of 1.08, a year ago the figure was 1.2.
The prominent mining corporations Rio Tinto and BHP have encountered recent challenges attributable to the decline in Chinese steel manufacturing, primarily influenced by the sluggish performance of the Chinese real estate sector and diminished profit margins of Chinese steel producers.
Although there are initial indications of stability in the real estate sector, market expectations for amore rapid recovery following the reopening of the Chinese economy in December were not met.
Consequently, despite the short-term weakness in iron ore prices, Australia's major resource companies are strategically positioned to benefit from any potential upturn in Chinese steel production.
Wesfarmers, a diversified conglomerate, increased its yearly earnings, resulting in a more than 3% rise in its stock price. This boost came following the disclosure of robust growth within its hardware retail division, Bunnings.This growth signifies a positive trend in the Australian housing market's stability.
A noteworthy mention for Commonwealth Bank becoming the first Australian bank to surpass the $10 billion mark in full-year profits. For the year ending June 30, their cash earnings surged by an impressive 6 percent, reaching an astonishing $10.16 billion. This exceptional performance was primarily fueled by the heightened interest rates on both home and business loans, surpassing the market's expectations.
In a comparison between Woolworths and Coles, Woolworths demonstrated superior performance. Coles is currently grappling with cost-related challenges and opted to maintain its final dividend at its existing level. In contrast,Woolworths not only revealed its strategy to combat 'shrinkage' or theft but also decided to raise its final dividend. Nevertheless, both companies face impending challenges due to evolving patterns in consumer spending.
Market Outlook
The global labour-market conditions remain tight while the inflation outlook remains quite challenging, more challenging than markets are prepared to acknowledge. Whilst headline CPI may have peaked and started to reduce from elevated levels, it remains uncomfortably high for central banks. Core inflation, which matters most to central banks, has remained sticky.
Progress in taming inflation has been slow due to strong services price inflation that in turn has fed through to higher wages. It is speculated that Australia is a long way from interest rate cuts, and there indeed may be a few more rate hikes to come.
In terms of economic activity, the RBA has only made a modest downward adjustment to its 2023 growth forecast.Whereas in February it projected 1.5% growth in real GDP, in May this was lowered to 1.25%. Still, low positive economic growth is not such a bad result given Australia’s high beta to world trade.
2023-24 is projected by the IMF to be the weakest two-year stretch for global growth in over 20 years.
Advancements in the Chinese economy, which is currently facing significant pressure, as our foremost trading partner, may exert a substantial impact on the Australian economy and corporate profits during the latter part of this year.
China’s reopening in 2023 as initially having held out false hope for the global economy and for are source’s exporter like Australia. China’s initial rebound has been concentrated on consumer services like travel, hotels, and restaurants. The rebound in manufacturing has been weak, reflected in shrinking import demand. Based on the latest monthly PMIs, the reopening boost to the Chinese economy appears to be fading.
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