A dire earnings season is set to kick off this week, with investors to get their first taste of how the COVID-19 pandemic is devastating the profits of many Australian companies.
“This earnings season is clearly going to be woeful,” said Monik Kotecha, chief investment officer at Insync Funds Management. “We’re in a period of dislocation and it’s obviously very different from previous periods, as this was a forced shutdown.”
Mr Kotecha was referring to government policies in March of ordering people to stay at home. Restrictions have since been lifted in most states apart from Victoria, which re-entered lockdown about two weeks ago due to a second wave of infections.
Dividends will be down by more than 20 per cent from the previous year.
— Jason Teh, chief investment officer at Vertium Asset Management
Against this backdrop, earnings for companies are expected to fall by 20.5 per cent in fiscal 2020 ( the 12-month period that ended on June 30) according to AMP Capital.
Iron ore giant Rio Tinto is the first major company to report, with its half-year results expected on Wednesday. Analysts who have lodged expectations with Bloomberg expect the firm to report a $US4 billion ($5.6 billion) underlying profit, down from $US4.9 billion, with its aluminium and copper businesses set to weigh on the result,
Other companies to report this week include CIMIC, Unibail Rodamco-Westfield, Janus Henderson, Credit Corp, Genworth and GUD Holdings.
“No doubt earnings this reporting season will be lower than the previous year,” said Jason Teh, chief investment officer at Vertium Asset Management.
“I’ve looked at reporting season from a dividend perspective. Dividends will be down by more than 20 per cent from the previous year.”
Health and financial crisis
The fund manager said that the pandemic was both a healthcare crisis and a financial crisis and those drivers would show up in the results of companies reporting in August.
“The healthcare crisis effect is pretty straightforward. Travel, leisure, those sectors have been really hit hard,” he said. “The financial crisis – bad debts and so forth – have obviously impacted the banking sector along with the slower general economy, which has also impacted most companies.”
Mr Kotecha agreed that companies that were closely tied to the economic backdrop are set for pain during reporting season.
“There are sectors that are going to be struggling through this period and they tend to be the most economically-sensitive sectors. Then, in addition. you have a lot of disruption.
“If you think about high street retailers such as David Jones and Myer, they were already struggling and all the pandemic has done is accelerate that trend down. Some of them are going to be structurally damaged for the long term now,” he said.
Mr Teh said that, like any crisis, there would also be some winners this earnings season. “COVID-19 testing may benefit pathology groups such as Sonic and to a certain extent Healius,” he noted.
Technology firms have been standouts during the pandemic, with buy now, pay later companies such as Afterpay hitting record levels as investor appetite for the sector’s growth and defensive qualities showed no sign of abating.
Increased working from home has also sparked demand for shares in companies such as data centre operator NextDC and Megaport, for example.
“I suspect that most of the technology sector names will hold up – in-line with what people were expecting,” said Jason Kururangi, fund manager at Aberdeen Standard Investments.
But with its recent sharp share price gains, the technology sector was also at risk of sharp losses. The US market slid on Friday, pummeled by a 16 per cent slide in the shares of US microchip maker Intel after it delayed a key product launch.
Intel’s results will be followed some of the biggest tech names in the US this week, Apple, Amazon and Alphabet will all report on July 30.
Just like Intel, technology companies were broadly priced for delivery. “You are paying for future earnings growth,” Mr Kururangi said.
ST Wong, chief investment officer at Prime Value Asset Management agreed, “Tech has met and exceeded expectations on disclosure so far but they will sell off if they fail to deliver.”
Aberdeen’s Kururangi also has an eye on the energy sector. “We own energy names,” the fund manager said, saying that the beaten-down sector could be quite interesting over the longer term.
While futures point to a 0.5 per cent decline for the S&P/ASX 200 Index on Monday, the index has rallied almost 33 per cent since the depths of the crisis in mid-March.
“The market is really looking out beyond the immediate period. They are sort of looking out over 18 months to two years, which is what stock markets do,” Mr Kotecha said.
“Once the lockdown starts to ease then hopefully things start to get a little bit better and the companies that are financially fit will see an earnings recovery over time.”