Sandstone Insights

John Lockton, Head of Investment Strategy

As central banks reach the end of their hiking cycles, equities will likely respond positively. Active selection is much more likely to be rewarded with investors again turning their attention to bottom-up fundamentals, rather than reacting to macro data. 

The market should grind higher, although it will likely continue to exhibit volatility until core inflation returns to more normalised levels. 

Both the US and Australian economies are likely to avoid a recession, showing a level of resilience, in part driven by a lack of financial leverage from consumers and corporates.

We prefer to be long sectors that have lower interest rates and are bond yield beneficiaries. Technology and other structural growth-related stocks should outperform as lower bond yields support higher valuations. 

We also view commodities favourably as economic activity proves to be more resilient than investors feared. The prospect of China fiscal stimulus and a lower US dollar add to the appeal of the sector.

Ultimately, the key measure of reporting season is what happens to the outlook for earnings. Market expectations currently imply a flat level of earnings growth during the 2024 financial year. We suspect there will little change to this estimate through the August reporting season in a reflection of consumer and economic resilience. 

Russell Investments

Alexander Cousley, Investment Strategist

Risks are building for Australian equities in the 2024 financial year, given the economy is slowing.  However, we should see decent relative performance to global shares as the risk of recession is lower than in other markets and resource companies could benefit from additional stimulus to the Chinese economy. 

Several themes could emerge from the upcoming earnings season:

• Pressure on profit margins as the result of a reduction in the pricing power of companies over the past three to six months.
• Consumers retreating from discretionary spending as mortgage payments start to bite (though the upper end of the population is still likely to be spending).
• Companies looking to increase capital expenditure as a result of weak productivity. 
• Quality companies, such as those with stable earnings growth and strong balance sheets, to outperform. Healthcare and IT fall into that category.

We will also be looking at the extent to which profit margins at the banks have deteriorated, given the further rise in cash rates and steady long end rates. 

Analysts have increased earnings expectations for materials over the last three months, and so we will also be watching how any forward guidance comes in relative to those expectations.

Infinity Asset Management

Piers Bolger, Chief Investment Officer

The probability of an Australian recession over the next year, remains evenly poised at around 50%, while in the US it is higher at 64%.

Any recession at this stage will be ‘mild’ in nature, and as such, will not be as destabilising for markets in the advent of a longer lasting, deeper slowdown. 

While inflationary pressures have moderated through the first half of 2023, they remain well above central bank target levels of 2% to 3% and have shown few signs of a rapid decline. 

With the projected peak rates expected to be reached in the second half of 2023, it sets the stage for a potential decrease in cash rates in 2024, should inflationary pressures continue to ease, setting the foundation from which markets can advance.

A rebound in the growth outlook for China would be a positive catalyst for financial markets while allowing for global growth to achieve a more stable footing. 

Where do we see the S&P/ASX 200 Index at the end of 2023? Based on current market valuations and using our forward P/E and the forward dividend yield assumptions for the market, we expect it to be only moderately higher (around +1.5% to 2.0%) from its current levels.  

However, over the medium term (2024/25), we do see earnings being upgraded, which should lead to an improved outlook.  

Equity Trustees Asset Management

Grant Mundell, Investment Specialist

The focus is shifting from inflation and interest rates to economic growth and company earnings. Consumer confidence has weakened, due to cost-of-living pressures from rising interest rates, electricity, and broader services. 

This will weigh on economic growth over the next 12 months. If economic growth slows as anticipated, it’s likely to flow through to lower corporate earnings. We have started to see downgrades to earnings-per-share (EPS) forecasts for the Australian equities market with EPS forecasts for FY23 now at 3% and FY24 forecast to be -3.2%. 

There is further downside risk to FY24 forecasts and, as such, this presents some risk to equity markets through to the end of 2023. 

In our view, while macro factors are important, in more challenging economic conditions, it is beneficial to focus on basic micro factors as to what makes a good business and investment. In Australian equities, we have a more positive view on general insurance, lithium and supermarkets.

In the past two reporting seasons, companies have been able to pass through cost increases and consumers have accepted those increases given strong consumer balance sheets, full employment and excess savings. This will become harder to achieve going forward and therefore company margins and earnings may disappoint.

Betashares

David Bassanese, Chief Economist

The moderating pace of inflation in the United States offers investors more hope that the US Federal Reserve can engineer a soft landing. However, this result is far from guaranteed and equity markets are likely not out of the woods just yet. 

On the fixed income side, bonds still look attractive with central banks close to the end of their tightening cycles and bond yields past their peak.  

Major themes from earnings season are likely to include the impact of the consumer spending slowdown on the retail sector, China’s sluggish recovery on the mining sector and the impact of rising mortgage stress on the banking sector. 

The overriding key theme will be pressure on profits given the downward pressures on local and global economic growth. 

It will also be important to watch the impact of rate hikes on corporate earnings. The market is expecting encouraging results in the US and obviously the hope is that this same trend will play out at home. 

Given strong population growth, a period of negative economic growth seems unlikely.  The downtrend in US inflation also suggests US recession could well be avoided. This bodes well for the local outlook. 

With inflation likely to gradually trend down, there’s a good chance the Reserve Bank of Australia can be more supportive of growth by early 2024.