First Samuel has been investing clients' assets for nearly 19 years. 225 months to be precise. And just eight months into FY-19 we have seen the 10th worst month of market returns (October 2018) and the 9th best month (February 2019) in those 225 months.
I note this to highlight that markets are indeed unsettled at the current time. And also to illustrate that they are, and always will be, volatile. The long term average experience for our clients over time, however, is very much skewed to the positive at +0.7% average monthly return.
February was 1-H 2018 company profit reporting ‘season’ for Australian listed companies.
Overall, the results of the reporting season were ‘modestly’ weak, with profit guidance soft but dividends surprising on the upside. According to UBS aggregate ASX100 company forecast earnings (i.e. profits) fell by -0.1% for FY-19, but tellingly within that forecast, resource company earnings rose +6.6%. Forecast Industrial company earnings fell by -2.8%, which makes it the weakest reporting season since 2010. Forecast Financial company earnings also fell by -1.9%.
However, the Australian market rose +6.1%! Meaning that expectations were very low post the -7.3% market return for the fiscal year to December 2018. Even weak growth is seen as positive by this market.
With consensus earnings now expected to grow only +3.8% for FY-19 (all driven by forecast resources +13.5%, with forecast industrials expected to fall -3.4%) this market catch up has all been driven by PE expansion. The value of Australian companies in the short term has not grown, but the prices investors are paying for them has.
As a result, a good deal of caution is in order. The market trades today once again at a P/E above its long term average, at 15.3x earnings.
But buyer beware: Six months ago the market was similarly riding a wave of positive sentiment with similar valuations only to be hit by the selloff in late calendar 2018. The next few months will be interesting.
Please read the special report on profit reporting season (below).
- Dennison Hambling