Tuesday 22 September 2015
Reporting season wrap: August 2015
Tuesday 22 September 2015
It’s not often that we get to take stock of our wins and losses and assess our skill in forecasting earnings. With the August reporting season now firmly in the rear-view mirror, we take a look not only at the results, but what drove volatility during August.
The latest reporting season could not have contrasted more with that of six months ago. The benchmark ASX200 Index (price index) fell 8.6% during the month compared with February’s 6.1% rise. And it was a volatile month too. On eleven of the twenty-one trading days in the month the Index closed greater than 1% up or down on the previous day’s close. There were only three days in February when the Index moved this much. All sectors of the market fell, even the defensive utilities sector didn’t have a positive return!
The Australian market was not alone in its decline – the US (S&P500) fell 6.2%, the UK (FTSE100) 6.7%, and China (Shanghai Composite) 12.5%!
Global equity index performance
Australian company reporting trends
This increased volatility has served to highlight two interesting points:
- The importance of a high conviction approach where avoiding some of the disasters has been as important as picking the winners;
- With increased volatility has come increased opportunity – not only were companies that missed earnings being punished but also those associated with these companies typically falling heavily (see the last point below).
Below are some of the key trends we have been focused on:
- Energy - Oil Producers Santos (-31%) and Origin Energy (-27%) led the declines in energy stocks over the month (the Macquarie High Conviction Fund has no exposure to these companies). The Brent oil price fell to a new seven year low of near US$42 per barrel during August. As these companies reported, the market was reminded of how stretched their balance sheets have become. Over the last few years Santos has been investing in its GLNG project, and Origin has had its APLNG project. Revenue from the LNG output of these projects is linked to oil, and fixing the capital structures of these companies will likely require asset sales, or additional equity injections.
- Banks - Three of the four major banks have now taken the opportunity to raise capital – NAB in May, and ANZ and CBA in June. We remain comfortable with an underweight position on the overall banks sector; with an overweight position in Westpac due to a more compelling valuation, and the ability to internally generate further capital for APRA’s latest requirements.
- Orica/IPL - Whilst it wasn’t due to report in August - Orica updated the market with earnings guidance ~15% below market expectations for FY16 resulting in the stock falling 17% over the month. This was due to largely company specific reasons – repricing of contracts being the largest driver. Incitec Pivot was caught up in the selloff, and we used this opportunity to add to our overweight position in the stock ahead of its September update.
Macquarie High Conviction Fund – How we went?
Our methodology of picking companies that are cheap on a 3-year view, with no near term earnings disappointment, continued to drive out-performance in the Macquarie High Conviction Fund versus the ASX200 Index in August.* Of the sixteen portfolio overweight positions that reported – six stocks beat consensus expectations, nine stocks were in line with expectations. We had only one miss (21st Century Fox) versus expectations. Notably strong results came from out of home media company oOH! Media and provider of community living, Gateway Lifestyle.