Market Insights for August 2017

This week saw the wrap up of the annual reporting season for Australian companies listed on the ASX.  The results have been contrary to the upbeat nature of recent business confidence surveys indicating the positive outlook of businesses.

More than half of all companies reported profits in line with forecast expectations which is the same as it was in February when half yearly results are announced.  However, there were only 15% of companies whose profits exceeded expectations while nearly 30% were below what was expected.¹

The mining sector, which has been out of favour for some time, was responsible for the majority of companies that exceeded expectations.  This is mainly due to increasing commodity prices over the past 6 to 12 months.  BHP for instance turned a $6.4 billion loss last financial year into a $5.9 billion profit driven by increasing iron ore prices.¹

Removing the mining sector from results leaves a glaring weakness in other sectors visible.  Telecommunications and insurance being the notable ones.

One of the positive themes from the reporting season has been the reports of increasing capital expenditure by some companies.  Over the past few years I have talked about companies not investing back into themselves but paying out higher dividends to shareholders and how this is not helpful in the longer term as higher dividends are not sustainable without additional revenue and profits.  It will be interesting to see if this theme remains consistent or grows in future reporting seasons as it is very positive for our economy and you as investors.

The share market has not responded remarkably to the reporting season ending the week were it started.  This year the market has risen about 3.5% and has been ‘choppy’ since June.  It is hard to see where it will end up this calendar year due to lack of government direction, the CBA banking issue and a rising Australian dollar.

This year marks the 10^th anniversary of the Global Financial Crisis.  It was August 2007 that the first cracks appeared in the property market in the US but the full effect wasn’t felt in Australia until early 2008 and continued until March 2009.

The US market has recovered well beyond what our market has and continues to impress with a return of over 18% in the past 12 months.  The market has reached new records this year topping 22,000 points and it shows no sign of slowing.  Market data from the US shows good economic strength built on the confidence of positive business sentiment and government policy.  However government is the single issue that could disrupt this growth.²

So again I have to say that diversifying a portfolio to include assets from various global and market sectors is the only way to be sure of a reasonable return without excessive risk.

1. abc.net.au, 28/8/2017
2. afr.com, 28/8/2017