Markets – February 2024

Australian company earnings are holding up in the current economic environment

Just over halfway through the current six-monthly reporting season, investors continue to be rewarded with higher earnings and increased dividends.

The major investor uncertainty of 2023 was around how company earnings would fare in an environment of rising interest rates and households adjusting to reduced cash flows, due to higher mortgage repayments and tax payments.

This month’s reporting season indicates households and consumers are challenged but holding up reasonably well.

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At CBA’s recent earnings update, CEO Matt Comyn commented that, ‘The economy has been fairly resilient, supported by a strong labor market, savings and repayment buffers, population growth and relatively high commodity prices’.

Comyn advised that CBA had seen a slight increase in arrears in its mortgage book, but that they remain at historically low levels.

Recent statistics on consumer confidence also support this view, with the Westpac Melbourne Institute Consumer Sentiment Index rising 6% in February, to sit at its highest level since June 2022.

At the time of publication, it was noted that moderating inflation and shifting expectations for interest rates appear to be the main factors behind the lift, with some additional support coming from the prospect of broader income tax cuts later in the year.

In another sign of confidence in the economy, auction clearance rates continue to improve, with figures for last weekend reaching 74% in Sydney and 69% in Melbourne.

With this improving confidence and increasing evidence that the economy is holding up better than expected, investors are becoming more forward-looking and are positioning for a brighter economic backdrop in the second half of 2024.

The key risk that I continue to monitor is around the expectation of the next movement in interest rates. Currently the market view is two interest rate cuts in Australia for 2024.

Interest rates in Australia are sitting at a neutral setting – they are neither supportive nor restrictive to the economy.

Yet should investment markets and the economy continue to improve, expected rate falls may be delayed. Instead, the RBA would hold rates at the neutral setting.

With rate cuts currently priced into the markets, any delay or stall would see markets reverse some of the recent gains.

Conversely, we may even see the RBA move interest rates higher. Though the probability is low, this outcome could lead to a downward correction in markets.

Keeping an eye on how inflation and the economy travels over the next six months will be key here.

Sources:  ASX, The Australian, Bloomberg, CBA, Morningstar, AMP Capital, Westpac, The AFR & 1851 Capital.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963

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