Fund managers wary as earnings crunch time looms Tom...

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    Fund managers wary as earnings crunch time looms
    Tom RichardsonMarkets reporter and commentator AFR
    Jul 3, 2020 – 12.58pm


    Equity investors have just ruled off one of the most tumultuous financial years in living memory but are now heading into more uncertainty, with the August reporting season looming as a key test of the steep market rally since March.

    A pandemic-induced shutdown of the economy shuttered a large swathe of businesses in the fourth quarter and other businesses moved to work-from-home models. Discount jewellery chain Lovisa revealed this week comparable sales fell more than 30 per cent in the quarter.
    While the ASX fell sharply from mid-February to mid-March, the market has rallied since then on hope for a gradual recovery in the Australian economy on the back of government stimulus and central bank support.

    The gains have stalled in the last few weeks as the August earnings season draws closer and as investors fret that the economic recovery will be delayed by fresh cases of the COVID-19 virus.

    "Right now it's a tricky time for investors," said Airlie Funds Management co-founder and portfolio manager Matt Williams who isn't expecting to get much clarity on the path of future earnings in the August reporting season. Many companies will decline to provide guidance due to the ongoing uncertainty around the virus, he believes.

    "Strong companies that have a strong market position like Wesfarmers, Bunnings, JB Hi-Fi, Coles, Woolworths, are doing well," said Mr Williams.
    Dire profits

    Strategists are expecting a dire set of profit numbers for the 2020 financial year. AMP Capital chief economist and head of investment strategy Shane Oliver is forecasting a 24 per cent drop in earnings for the 12-month period to the end of June. Second -half earnings likely fell 30 per cent, he said.

    The sectors that likely saw the most earnings pressure in financial year 2020 included insurance, with earnings expected to drop 65 per cent, energy, with earnings expected to drop 50 per cent, and gaming, with earnings expected to fall 45 per cent.
    At present, Dr Oliver isn't expecting a positive earnings performance from any sector although consumer staples "could creep over the line."

    Other sectors that could edge into positive territory include the miners, where earnings are expected to be 5 per cent to 6 per cent lower, and telecom companies where Mr Oliver has pencilled in a fall of 2 per cent for the year.

    In financial 2020 the healthcare and information technology sectors advanced 26 per cent and 18 per cent respectively, thumping the benchmark S&P/ASX 200's 11 per cent fall. The worst sectors were energy, down 31 per cent, and financials down 25 per cent.
    Dr Oliver is expecting earnings to rebound by 8 per cent in financial year 2021.
    Recovery

    Will Curtayne, portfolio manager at Milford Asset Management, is more downbeat than the market on the expected trajectory of the earnings recovery. The market expects earnings to be back at pre-COVID-19 levels by financial year 2020 but he said "we think it'll take longer to return employment to where it was."

    Still, Mr Curtayne noted that a poor earnings result doesn't necessarily mean the sharemarket won’t go higher, as monetary stimulus and sentiment are arguably playing a bigger role than earnings in the short-term.

    "There's no doubt equity markets have been supported by the huge amount of money printing. The fact people think the central bank has got their back. Jerome Powell says he'll do whatever it takes," said Mr Curtayne.
    The fund manager added few investors thought interest rates in financial 2021 would be even lower than financial 2020, which means price-to-earnings (PE) multiples have climbed for high-quality growth companies.

    "In this environment you could argue Woolworths should be seeing PE multiples as high, or higher, than the start of the year. It's unchanged from where it was pre-COVID.

    "It did well in the middle of March when people realised it was a safe haven. This is a reminder that it's a truly defensive asset that does well in weak economies, if the virus outcome is terrible, people will be forced to spend more at supermarkets."

    Mr Williams agreed supermarkets offer rare certainty amidst the economic cross currents. "What this crisis has brought home is that the strong well capitalised businesses have the wherewithal to invest, whilst a lot of the up and comers find it difficult.
    Gold

    Gold is also attracting attention from fund managers holding the view that cash is being devalued by unprecedented quantities of monetary policy easing, Some believe gold could outperform the sharemarket in this environment.

    "Gold is a good way to benefit from all that. We like the high-quality large-cap end. Our larger holdings are Evolution, Saracen and Northern Star, we also have some Newmont in the US. A mix is a way to have exposure to gold as an alternative currency to every other currency in the world, which is quickly being devalued by all the money printing," said Mr Curtayne

    On the flipside, the fund manager warned the beaten-down share prices of travel and leisure businesses may be more fool's gold, than anything else.

    "The share prices may look like they're a long way from highs, but because they've raised huge amounts of equity their market caps aren't too far below where they were pre-crisis," said Mr Curtayne.

    "There's probably a permanent impairment to the value of business travel and a multi-year impairment to the level of leisure travel.

    All these companies; Flight Centre, Qantas, Webjet, were getting caught up in some sort of hype where people were chasing bargains in early June."
 
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