Equity investors have taken to the sidelines as uncertainty over inflation persists.
In the US, share prices fell this week after an unexpectedly hawkish message from Federal Reserve chairman Jerome Powell, who said the ultimate
Equity investors have taken to the sidelines as uncertainty over inflation persists.
In the US, share prices fell this week after an unexpectedly hawkish message from Federal Reserve chairman Jerome Powell, who said the ultimate level of interest rates was likely to be higher than previously anticipated.
Later in the week, the Reserve Bank of Australia’s Philip Lowe appeared to strike a more dovish note, hinting that the end of the tightening cycle may be in sight.
The central banks’ seemingly divergent views reflected the uncertainty in the financial markets over the likely course of inflation and interest rates, said Harbour Asset Management portfolio manager Shane Solly.
“People are standing back,” he said. “What we know is that is that investors have generally lower exposure to equities at the moment and have actually got more in cash.”
Inflation in New Zealand was last clocked at 7.2 per cent for the 2022 year.
This country’s Reserve Bank is widely expected to raise its official cash rate - now at 4.75 per cent - by half a percentage point at its next opportunity on April 5.
Meanwhile, more local companies are raising funds through the debt market - Summerset ($175m) and Meridian ($200m) being two examples.
Stock market volumes are low and there was some volatility in prices, Solly said. “There are lots of different currents pushing markets around at the moment.”
Despite the uncertainty and a disappointing reporting season, the local share market had managed to hold up well.
The New Zealand reporting season for the December period was mixed, with actual results in line with expectations and revenue holding up better than expected, while profit margins came under pressure.
“But 53 per cent of New Zealand companies saw post-result consensus market earnings forecast revision downgrades, and 21 per cent of companies saw profit upgrades,” said Harbour.
Spark New Zealand was the key larger capitalisation stock to disappoint.
In Australia, 39 per cent of companies saw their consensus market profit forecasts downgraded after their results, while 19 per cent had profit upgrades.
Companies highlighted higher costs from inflation, ongoing labour market pressure, higher interest rates, insurance and regulation costs.
“The ability of firms to pass on higher costs has reduced with slower economic activity,” Harbour said.
“Investor expectations had been low going into profit reporting season, protecting the market from a more negative reaction,” it said in a report.
Brokers Forsyth Barr said the reporting season was weak but could have been worse.
By its calculations, companies’ median net profits grew by about 7 per cent versus last year, but were 2 per cent below its own estimates.
“Earnings have also broadly been revised down as operating and financial expenses continue to surprise to the upside and misses slightly outnumbered beats,” the broker said in a review.
However, there were bright spots.
“Revenues continue to surprise to the upside and the last six months has been one of the strongest on record for revenue revisions; not your typical down cycle.”
However, Ebitda margins continued to be squeezed as cost growth outpaced revenue growth.
“The knock-on implications from Covid lockdowns and demand distortions continue to muddy the waters, but we walk away from this earnings season slightly less concerned that a dramatic downgrade in earnings is around the corner,” Forsyth Barr said.
In a typical downgrade cycle the further down the profit and loss you look, the more substantial the downgrades are, as operating costs and financial leverage takes their toll, the broker said.
At first glance, this downgrade cycle was no exception, it said.
Net debt development was an area of some concern.
Only six of the 32 companies analysed reported full-year results, so data on balance sheets and cash flow was patchy.
“What we can glean is not particularly encouraging.
“Excluding Vector and Spark, both with major asset sales, we model net debt to increase by about $3b in 2023 over 2022 and a further almost $1.5b in 2024.”
This translated into a two-year cumulative increase in net debt of almost 30 per cent.
“Furthermore, the direction of travel is firmly negative; we have increased our 2023 and 2024 net debt expectations by about 5 per cent in both years.
“While there are always idiosyncratic explanations, the trend is relatively broad-based with signs of debt build-up across both consumer and industrial stocks.
“In each individual case there is a good explanation for why debt is going up but put together we view it as an area of concern that we will keep a close eye on.”
Broker and wealth manager Jarden said car dealer and auctioneer Turners Automotive looked to be well-positioned to handle an expected downturn.
The company this week raised its annual earnings outlook a tad to at least $44m from previous guidance of “at least or slightly above” the 2022 year’s $43.1m.
Turners continued to experience ongoing strength in the auto retail division, with market share growth across new and existing sites alongside stable margins.
Arrears ticked up in December and January but improved in February, in line with seasonal trends.
“Whilst Turners suffered no damage to its branches or operations as a result of the recent North Island weather events, we expect demand for replacement of flood-damaged vehicles to be supportive of prices and margins over coming months,” Jarden said.
“Turners is benefiting from a strong operating environment, with vehicle supply constraints and low unemployment supporting vehicle prices and margins.
“However, we do see the risk of a downturn over coming months with cost-of-living and interest-rate rises impacting consumer spending and balance sheets - risks that we factor into 2024 and 2025 through subdued revenue growth and higher impairments.”
Shares in ASX-listed Kiwi accounting software company Xero rallied back to September 2022 levels after new CEO Sukhinder Singh Cassidy announced the company would cut up to 800 jobs.
The stock last traded at A$85.55, up by about A$6 on the day.
Xero wants to “streamline its operations, realign the business to drive greater operating leverage and better balance growth and profitability”, according to the ASX.
The company said it would exit its cloud-based small business lending platform Waddle, which it bought in 2020, incurring a writedown of A$30m to A$40m.
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