This article first appeared in the AFR on 17 March 2024
Company reporting season in February and August, when most companies report their half or full year results, always unearths interesting stories and highlights some underlying economic trends. February was no different.
One key observation was consumers are still spending whereas corporates are now starting to cut costs. The differences in spending patterns were stark. Inflation coupled with higher wage pressures has resulted in a tightening of the belt for corporates as they seek to protect profitability. Stronger cost control was evident across the market and contributed to the better-than-expected earnings season results.
Consumers on the other hand, are still spending. The retail and consumer discretionary sectors were particular standouts and the better-than-expected results saw stock prices responded positively. Given higher interest rates and inflation, the market has been waiting for consumer weakness over the last couple of years, but it continues to remain above expectations and in some areas is quite buoyant. Earnings results for JB Hi-Fi, Wesfarmers and a number of other retailers were surprisingly resilient. Some of this strength can be put down to savings accrued throughout Covid, older demographics with low debt and population growth. And we may see consumer spending come off, as rates remain higher and excess savings deteriorate.
The difference between corporate and consumer spending was perhaps best reflected in the earnings results from travel agents. Corporate travel agents delivered weak results whereas those targeting mums and dads had much better results signalling that while consumers are still keen to travel corporates are pulling back. I’ll certain be watching closely to see if higher interest rates and cost control measures start to spill over into the consumer sector.
The other sectors that saw stand out positive results were technology and insurance. Insurance companies are getting better at correctly pricing risk, and we’re seeing some rate increases and changes to conditions and excesses to better manage costs. In addition to a positive earnings environment Suncorp finally received initial approval of the sale of its bank to ANZ. Full approval should occur closer to mid-year. After the sale, the very strong capital position of Suncorp should allow for strong dividends and capital returns.
Resources had a weaker earnings season as commodity prices broadly softened with a weaker China property market and a cyclical dip for renewables used in electric vehicles and wind turbines. Profits and dividends were still reasonable, but down on last year.
Healthcare and in particular private hospitals and allied services are still recovering post the Covid period. Wage and non-labour inflation have been costly and with private health insurance companies passing on limited price increases, the sector is finding the recovery slow.
In this environment, ‘self-help’ companies or companies that can help themselves tend to do quite well. Essentially if you can control your own costs, you have greater control over your destiny. This should also mean that individual company fundamentals become more important as share price drivers, rather than macro-economic factors. Macro-economic factors have dominated the last couple of years, and we’ve seen major disruptions and changes in variables like inflation and interest rates. As macro-economic conditions stabilise, this should also allow corporates to gain confidence and move forward with projects and growth capex. The recent significant increase in merger and acquisition activity is also a reflection of the growing confidence of corporates to better assess projects and growth options. This will be the best self-help story.
