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.
All information is current as at its published date unless otherwise stated. Not for use by or distribution to retail investors. Only available to a person who is a "wholesale client" under section 761G of the Corporations Act 2001 (Commonwealth of Australia) ("Corporations Act“)
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (‘Fidelity Australia’). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making any investment decision, investors should consider seeking independent legal, taxation, financial or other relevant professional advice. This document is intended as general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. You should also consider the relevant Product Disclosure Statements (‘PDS’) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 044 922 or by downloading it from our website at www.fidelity.com.au. The relevant Target Market Determination (TMD) is available via www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated about specific securities may change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. You should consider these matters and seeking professional advice before acting on any information. Any forward-looking statements, opinions, projections and estimates in this document may be based on market conditions, beliefs, expectations, assumptions, interpretations, circumstances and contingencies which can change without notice, and may not be correct. Any forward-looking statements are provided as a general guide only and there can be no assurance that actual results or outcomes will not be unfavourable, worse than or materially different to those indicated by these forward-looking statements. Any graphs, examples or case studies included are for illustrative purposes only and may be specific to the context and circumstances and based on specific factual and other assumptions. They are not and do not represent forecasts or guides regarding future returns or any other future matters and are not intended to be considered in a broader context. While the information contained in this document has been prepared with reasonable care, to the maximum extent permitted by law, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. Past performance information provided in this document is not a reliable indicator of future performance. The document may not be reproduced, transmitted or otherwise made available without the prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Fidelity Australia.
Neither Fidelity Australia nor Fidelity International warrants or guarantees that this website, any webcast, podcast or video, and the server which makes it available is free from malware, viruses, worms or other harmful computer software or technology. Any links provided to third party websites are provided for your convenience only. Fidelity Australia does not endorse or otherwise approve the views, products or services of those third parties or warrant or guarantee the accuracy, completeness or currency of the information contained in these third party websites.
© 2024 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.
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.
