Winners and losers in the latest reporting season
James Abela discusses the major themes to emerge from reporting season, what’s putting pressure on margins and the outlook for Australian small to mid-caps.
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So the positive results were really in technology, was one. Appen and WiseTech. Then in property with Charter Hall, then also Lovisa, which is a global consumer, and then also financials such as Pinnacle. Now, the reasons why a lot of these stocks did well is that they're in good market structures. They ultimately have very good visible businesses where the growth outlook is quite firm, but also the market structure allows them to maintain margins, maintain growth in an environment which is getting tougher for most companies. So inflation, employment, all these pressures, still meant that these companies still delivered good results in a market which is becoming tougher.
So the stocks that delivered negative results, really stocks like Evolution, which was really cost pressure in the gold sector. Then (inaudible 47secs) retail, which is really due to the COVID cycle coming off, but also just more cost pressures and competition pressures that are really impacting that universe.
Another a negative one is in technology, which was Appen, which again, tough market structure. That market structure is changing. It wasn't able to really provide strong outlook or even solid earnings in this half. So that one really had a very tough one.
And the last group was really eCommerce. So stocks like Kogan, which again were huge COVID beneficiaries in 2019 and 2020. 2021 that softened, and now in 2022, it's become a lot harder in terms of customer acquisition costs, but also sales are now coming off quite sharply as consumers now return to normal shopping habits in the shops rather than online.
Reporting season really highlighted the fact that cost pressures are now building. So you've got tighter employment, higher cost of capital. You've got more competition, and that means that things are getting tougher is really the key.
Resources were really strong. So although they had cost pressures within resources, the top lines are really strong in resources.
And then also the COVID normalisation is definitely coming through right across the universe. And also M&A has started. So you had Nearmap getting taken out and also Oz Minerals getting taken out by BHP. And so they're the major themes that are coming out of reporting season.
So the next six to 12 months is likely to change. I mean, the expectations of the market is the pressures that are building now will start to play out over the next six to 12 months. So consumer confidence is still quite high. Business confidence is actually very, very strong because of COVID normalisation is really occurring. But tighter employment, higher inflation, higher costs, more competition, these are likely to put pressure on margins, especially where you've got weak market structures or more competitive market structures. So that means likely to get margin pressure and possible downgrades over the next six to 12 months. And the dispersion in stocks will probably become more pronounced as you get those high quality, good market structure companies still doing quite well in their universe. And those that are in more competitive markets where there's tougher market structures, they're likely to face stronger market pressure, especially where there's commoditized markets or commoditized products. And resources we expect in the middle will still do quite well.
05 September 2022
James Abela
Portfolio Manager, Fidelity Future Leaders strategies
Portfolio Manager, Fidelity Global Future Leaders strategies
