The first half of the financial year 2022–23 reporting season follows a period that has seen interest rates rise rapidly to battle high inflation.
Ausbil said that while the economy has been resilient and operated at near full employment, 10 consecutive rate increases have unsurprisingly resulted in a slowdown.
“While Ausbil’s view is that Australia will avoid recession, there has still been some derating in market earnings with slowing demand,” the fund manager said.
“Ausbil believes we are entering a period of stabilisation where we expect rates to peak and hold for some time while the economy adjusts to the recent tightening cycle.”
According to the firm, there is evidence of inflation and a slowdown in the outlook statements and guidance for FY23, though not all companies are being negatively impacted by current conditions.
Ausbil further explained that due to cost pressures, several companies across sectors have fallen short of expectations. Moreover, given the uncertain trajectory of interest rates and inflation, outlook statements are being approached with caution.
“Australian companies reported a slightly disappointing season relative to expectations, with earnings falling 2.2 per cent in nominal terms in HY23 compared to HY22, due to a combination of factors including lower commodity prices, higher interest rates and inflationary pressures impacting cost growth,” Ausbil noted.
“Earnings per share (EPS) revisions for the market have turned negative for FY23 and FY24, and the growth outlook, while positive has softened. Consensus expectations for earnings growth were +5.0 per cent for FY23 and +3.0 per cent for FY24 (S&P/ASX 200).”
Dividends were also slightly below expectations, while the dividend yield outlook for FY23 stood at 4.3 per cent (S&P/ASX 200). Ausbil attributed this to a mix of inflation, rates, and other margin pressure, in addition to general market uncertainty.
“We are also seeing some of the difference in dividends from expectations being reinvested into capex. Overall, the reporting season has shown the resilience and health of Australia’s corporate balance sheets even with the raft of pressures they are facing on inflation and costs,” Ausbil said.
The fund manager said there is ongoing caution around outlook statements and wider guidance ranges.
“We see this as largely being related to the unknowns around energy, where the current tightening cycle will end, unknowns around how the consumer is coping with tighter conditions, and the risk of central banks pushing too far on policy,” Ausbil said.
“Looking ahead, we like critical metals and commodities for the long rotation from fossil fuels to renewables in the great decarbonisation and the electrification-of-things.”
