Earnings season could throw up some positive headlines in an otherwise uncertain market
COMMENT:
The international corporate reporting season is winding down this week, just as ours in New Zealand begins. If offshore trends are anything to go by, we should expect some positive headlines.
Almost 80 per cent of the companies in the S&P 500, the key US sharemarket index, have now reported earnings results, and almost three quarters of these have exceeded initial forecasts.
The overall earnings growth rate for the S&P 500 for the December quarter is now sitting at 2.9 per cent. Admittedly, that doesn't sound hugely impressive on the face of it.
However, it's much better than the 6.8 per cent decline that was expected just before the reporting season started.
It's also quite remarkable that despite everything that happened last year, the US sharemarket generated more collective profits in the final three months of 2020 than it did in the same period a year earlier, before Covid-19 had even reared its head.
It's our turn now, although New Zealand operates on a six-monthly reporting cycle, rather than a quarterly one like the US.
The results from our listed companies will cover the second six months of the 2020 calendar year, with these mostly benchmarked against the corresponding period during 2019.
There are several listed companies due to report over these coming five days, including some of the heavyweights like Contact Energy, Fletcher Building, Sky City and Auckland Airport.
Next week will be even busier, with almost 30 of the major listed companies in New Zealand due to announce results.
Many of these should release some predictably solid numbers, with minimal risk of disappointment. That includes the electricity companies, those in the listed property sector, and the likes of Ebos, Spark and Vector.
Retirement village operator Summerset should have plenty to crow about, given the strength of the housing market, while Freightways should be benefiting from the recent uptick in activity.
The a2 Milk Company will be closely watched. After a seemingly good start to 2020 it stumbled late in the year and investors will be looking for signs of whether things are getting back on track.
Investors will be hoping that agricultural representatives Delegat Group and Scales are experiencing the strong demand that has buoyed the dairy sector, while Port of Tauranga's result should shed some light on the current state of global supply chains.
Generally, this should be a much more successful period than the previous six months (to the end of June last year). However, for many companies the year-on-year comparisons with 2019 could still look quite challenging.
The domestic economy bounced back strongly during the last few months of 2020, and the optimism has continued into this year. We'll be expecting management teams to strike a much more upbeat tone, compared with the caution and restraint that dominated result announcements in August.
Another focal point could be the impact of currency moves. Over the past 12 months the NZ dollar has strengthened against the US dollar and the British pound, but fallen against the Australian dollar.
Whether these moves have been a headwind or a tailwind depends on whether one is an importer or an exporter, and which parts of the world one buys from and sells to.
Similarly, the economic divergence across the world will be a factor when hearing from businesses with global operations. China and the US have looked consistently strong, while the UK, Europe and Japan have continued to struggle.
This reporting season should also herald the return of dividends for many companies, which will be music to the ears of local investors with a penchant for income.
Suspending, reducing or temporarily cancelling dividends was a prudent measure at the height of the pandemic, and the willingness to fully reinstate them will tell us a lot about boardroom confidence levels.
Last but certainly not least, evidence of cost pressures will be something to look out for.
Costs are going up, without a doubt. However, it is the ability of firms to raise prices without losing customers and the permanence of higher costs that will determine if margins (and profits) can be maintained.
As we've seen in other parts of the world in recent weeks, let's hope we're pleasantly surprised this reporting season, and that corporate New Zealand proves that its prospects are brighter than many expect.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice.