4 key themes to watch ahead of this year's ASX200 reporting season

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Earnings season in Australia is about to get into full swing, and ASX companies are expected to deliver earnings growth of around 9% for the 2018 financial year.

Gains this reporting season are likely to be underpinned by the mining sector, UBS says.

Rio Tinto announced last night that it’s returning $US7.2 billion to shareholders, and a similar return is expected by BHP following the sale of its US shale oil assets.

“On an ex-resources basis, Australian earnings appear much weaker at around 5%” UBS said, citing a drag from the banking sector as margin pressures rise amid the ongoing housing downturn.

Source: UBS

Ahead of this year’s reporting season, the domestic quantitative strategy team at UBS have highlighted four other key themes to watch:

1. Domestic economic conditions should remain relatively supportive

The UBS analysts described the current macro conditions as “benign”.

Companies with exposure to Australia’s ongoing infrastructure boom should benefit, while solid results in the mining sector may provide opportunities for mining services companies to book in new contracts.

“Trading conditions in the retail space are likely to remain tough, particularly among the discretionary names,” UBS said. Consumer discretionary stocks include companies such as JB Hi-Fi, Domino’s Pizza and Harvey Norman.

In addition, the well-documented rise in bank funding costs will continue to put pressure on lender margins.

However, “low interest rates, stable unemployment and solid business conditions” means UBS isn’t concerned about a material rise in bad debts.

2. ‘Growth’ vs ‘Value’ stocks

UBS said domestic growth stocks have outperformed value stocks by 6% so far this year, despite a pullback in June.

Such companies are so-named because they have been flagged by the market as having strong future earnings potential. That drives their share price higher relative to current earnings, which leaves them with a higher price-to-earnings (PE) ratio.

However, “valuations among the high PE high growth companies remain stretched and there is generally little margin for error,” UBS said.

The analysts highlighted Cochlear and REA Group as two companies which could see sharp falls if earnings forecasts miss expectations.

3. Companies which earn US dollars

Australian-based stocks with operations in the US have benefited from last December’s US tax cuts and the strong near-term outlook for the US economy, UBS said.

The analysts highlighted Bluescope Steel and Treasury Wine Estates as two companies with strong earnings expectations due to their US exposure.

4. Dividends and capital management

The analysts said the mining sector is best-placed to deliver an upside surprise on dividends.

In addition, BHP’s recent sale of its shale oil assets should be the catalyst for a large share buyback which will boost earnings per share by around 9%, UBS said.

“Whitehaven Coal and Alumina could also deliver capital management surprises.”

The analysts said the broader market is currently trading on a price-to-earnings multiple of 15.4 times, which is about on par with the 20-year average of 14.7 times.

Company reporting season gets into full swing next week, highlighted by Commonwealth Bank (full-year) and AMP (half-year) results on Wednesday.

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