With earnings season for the 2017 financial year largely complete, most analysts agree that ASX200 company profits have been steady if not spectacular.
Of the 139 ASX-listed companies with a June reporting date, 119 had reported results by Friday.
Commsec research shows that around 90% of reporting companies have made a profit, which is above the long-term average (87%) but slightly below the 94% achieved in February reporting season.
AMP chief economist Shane Oliver said that around 70% of companies reported an increase in profits from a year ago — the best percentage since 2010. The 17.5% growth in earnings per share was also the best in two years, he said.
But Oliver noted that a significant amount of the profit growth story was driven by resources stocks.
Profits in the resources sector rose by 130% — certainly an impressive annual turnaround and proof that the big Aussie miners were well setup to benefit from rising commodity prices.
Take away resources though, and the picture isn’t so rosy — the rest of the market only achieved profit growth of 5-6%.
While 5-6% growth is OK, it means that outside of its dominant sectors the ASX200 is still struggling for traction. And compared to global stocks, Australia is falling behind.
Oliver cited comparative growth of 11% for US stocks, while recent growth in Europe and Japan is closer to 30%.
In view of that, Oliver argued that Australian equity investors should continue looking abroad. “It’s another reason to maintain a bias towards global shares over Australian shares,” he said.
While the broader market has been largely flat during earnings season, Oliver noted that there was significant underlying volatility.
Market reactions to a stock price on earnings day are driven by how a company’s profit compares to the market’s expectations, and what guidance is provided by management for the year ahead.
Oliver said that “outlook guidance has been a bit soft”, while large companies such as Telstra, Bluescope and QBE were sold off sharply on negative surprises.
“What’s more only 38% of companies have surprised on the upside (which is less than normal and the weakest since 2012) and 32% have surprised on the downside,” Oliver said.
Although Telstra was hammered, largely because it cut its dividend, Oliver said that Australian companies still love to return capital to shareholders with dividends up from a year ago
In addition to the resources revival and high dividends, Oliver highlighted the out-performance of large-cap stocks relative to small-caps, and tighter conditions in the domestic economy putting a cap on topline revenue growth.