Tribeca Investment Partners expects the August reporting season to separate the ‘wheat from the chaff’ in listed companies, with its portfolio managers suggesting slowing economic activity, higher interest rates and higher labour costs will slow corporate earnings results.
Jun Bei Liu, lead portfolio manager of Tribeca’s Alpha Plus Fund is expecting the coming reporting season to be one of the softer reporting seasons in recent periods.
“We are expecting company revenue to be under more pressure and that margins will continue to move lower, given the slowing economic activity and higher inflation. However, this is a mixed bag when looking deeper into each sector.
“We are expecting consumer facing companies, such as retailers, to report in line with expectations as many have already downgraded. It is likely the first six weeks trading update will be softer than expected.
“We anticipate a cautious outlook statement from companies with higher costs, and freight costs in particular have moved up significantly. It will be interesting to observe share price reaction post these softer results from consumer companies as many are trading at high valuations.
“Healthcare will have better results this year compared to previous years, though the costs pressures mentioned above also remain high for this sector, and we don’t expect meaningful price impact.
Ms Liu says banks continue to have a strong capital and she expects more capital management initiatives to come from this sector. On the resources side, Ms Liu is expecting some underperformance given China’s economic weakness, but she notes there are companies still trading at a discount.
“Resources have been an underperforming sector heading into earning season. However, we believe large, diversified resource companies such as Rio Tinto (ASX: RIO) and BHP Group (ASX: BHP) are trading at a steep discount to NTA with a small earnings upgrade expected. This sector is likely to improve once it delivers to result expectations and pays out large dividends.
“Overall we are expecting the consensus forecasts to move lower in the single digits for FY25 on softer guidance which does provide a nice rebase before the expected interest rate cut next year,” says Ms Liu.
Meanwhile Simon Brown, Australian Smaller Companies Fund portfolio manager, cautions that higher interest rates could hit earnings growth of some companies.
“This presents risk to the earnings forecasts in for the first half of 2025. For now, we favour exposure to companies such as Flight Centre Travel Group (ASX: FLT) that will benefit from more affluent/less indebted consumers and those with the ability to grow under their own steam,” he says.
“Mining and associated sectors should benefit from buoyant commodity prices and easier operating cost environment. Outlooks will be influenced by Chinese economic conditions given their share of global resources consumption, but right now, margins are pretty good for Australian resources companies,” he says.
“While we agree that any surplus of material across the commodities sector is unlikely to be helpful of prices in the very short term, this is not going to incentive new tonnes in the medium term to fill the fast-growing need for product,” Mr Brown said.
“Interest rate sensitive sectors such as REITs have also done well recently in anticipation of a near-term rate cut in the US, despite sticker inflation here. Given the underlying strength of the respective economies, continued stimulus and upcoming elections, we don’t anticipate materially lower long term interest rates to drive these sectors meaningfully higher.
“Some developed market central banks have now started their rate cutting cycle as inflation pressures fade, but the pace of easing will likely be more modest than expected a few months ago. Australia is proving an exception to this view, as inflation is looking more stuck than sticky, creating a bias for further tightening from the Reserve Bank,” said Mr Brown.
Domestically, he notes large caps have noticeably outperformed their mid and small peers, and financials have led as banks continued to defy valuation expectations.
“Laggards have included materials, energy and industrials companies,” he says.
