Amazon and China and bears... oh my!

Earnings season kicks off this month Down Under with shareholders keen to know how the nation’s top companies are handling overseas competition and performing in lucrative new markets. Investors will also be looking at how potentially higher interest rates globally will affect the equities market.

Company earnings are expected to rise by about 11 percent in the next 12 months, according to data compiled by Bloomberg, with local businesses having a more optimistic outlook amid a healthier global economy.

Here are five things to look out for in the Australian reporting season:

1. Digging and Drilling Set to Pay Off

Analysts expect earnings per share for resources stocks to rise about 60 percent in 2018, almost six times the gain expected in the broader S&P/ASX 200 Index, according to data compiled by Bloomberg.

Australia’s resources stocks rose about 24 percent in the six months to Dec. 31, outperforming the Bloomberg Commodity Index, which tracks returns on 22 raw materials.

Key stocks to watch: Rio Tinto Ltd., BHP Billiton Ltd., Fortescue Metals Group Ltd., Woodside Petroleum Ltd., Oil Search Ltd., Santos Ltd., Newcrest Ltd., Northern Star Resources Ltd., Independence Group NL

2. The Not So Hidden Dragon

Keep an eye on the outlook for Australian health and consumer goods exporters exposed to China’s expanding middle class.

Retail sales in the world’s second-largest economy rose 10.2 percent last year, according to the National Bureau of Statistics. That helps explain how A2 Milk Co. Ltd. more than tripled in value to be the best performing stock on benchmark indexes in the South Pacific last year.

“China could overtake the U.S. as the world’s largest supplement market within five years, as its shoppers buy more goods to fight off colds, strengthen bones and promote general well being,” said Bloomberg Intelligence analyst Thomas Jastrzab.

Still, it’s all dependent on obtaining import permits from Chinese regulators and a sound strategy to access the lucrative market.

Key stocks to watch: Blackmores Ltd., Bellamy’s Australia Ltd., A2 Milk Co. Ltd., Synlait Milk Ltd., Ansell Ltd.

3. And The Verdict On Amazon Is?

Retail stocks underperformed last year, weighed down by weak consumer sentiment and fears Amazon.com Inc. would crimp profit margins once it began local operations. Yet retail sales were up 2.9 percent year-on-year in November, according to the Australian Bureau of Statistics, while JB Hi-Fi Ltd. had a stronger than expected Christmas, according to Morgan Stanley.

“The yawn on Amazon’s entry was deafening compared to what we saw in the run up,” said Julian Beaumont, investment director at Bennelong Australian Equity Partners, a unit of the A$9 billion ($7.2 billion) Bennelong Funds Management. “Amazon isn’t going to be the killer, at least in the near term, as people think.”

However, department stores remain under pressure.

Cape Town-based Woolworths Holdings Ltd. last month slashed the value of its local David Jones unit by about 20 percent, citing a downturn in sales and “structural changes” that have impacted performance in the sector. Myer Holdings Ltd. is also struggling to meet targets.

Key stocks to watch: JB Hi-Fi Ltd., Harvey Norman Holdings Ltd., Kogan.com Ltd., Myer Holdings Ltd., Woolworths Group Ltd., Wesfarmers Ltd.

4. The Bond Proxies

Expectations for higher interest rates in some markets has led to a surge in bond yields, which is playing havoc with some stocks.

Gold miners and stocks with a higher payout ratio, or those with weakening growth prospects are most vulnerable to an increase in bond yields, Credit Suisse analyst Hasan Tevfik wrote in a Jan. 30 note to clients.

“Right now, bad for bonds is good for equities,” he said. “However, the entire equity market has not escaped the erupting Bondcano.”

Key stocks to watch: Northern Star Resources Ltd., BWP Trust, Sydney Airport Ltd., Newcrest Mining Ltd., Evolution Mining Ltd., Northern Star Resources Ltd., Independence Group NL, Charter Hall Ltd., Dexus, Goodman Group, Scentre Group Ltd., Stockland

5. Bears Beware

Consumer discretionary is the most shorted sector in Australia - at more than twice the rate of the next most bearish sector on the ASX 200 - but there’s a history of surprising at earnings.

APN Outdoor Group Ltd., Greencross Ltd. and Flight Centre Travel Group Ltd. are the only consumer discretionary stocks with short interest of more than 10 percent of the equity float that had a negative adjusted earnings-per-share surprise at their last semi-annual profit report, according to data compiled by Bloomberg. That compares to about half the index that produced a positive surprise at their last half-year earnings, data show.

Flight Centre, which has the most bearish bets on Australia’s benchmark as a percentage of its equity float, squeezed short sellers in August after reporting better-than-estimated earnings. Progress on the travel agency’s transformation program, which is expected to substantially grow earnings, will be closely watched, Beaumont said.

Source:
courtesy of BLOOMBERG

by Matthew Burgess

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