Markets – September 2024
Reporting season provided an average earnings update, but good news on dividend payments
The six-month reporting season allows investors to recalibrate their market thesis to align with reality.
It provides a check-in to see if the actual figures meet, exceed, or disappoint investors’ expectations of each company’s earnings.
2023-2024
It also provides an opportunity to identify any fault lines developing in specific sectors of the economy, where emerging risks are likely to impact companies’ earnings.
Overall, just under half (47%) of ASX reporting companies landed on target, matching their earnings with expectations.
This left 27% of companies surpassing expectations, and a relatively high 26% underperforming.
The updates highlighted two key points:
- There is a cautiousness about the twelve-month outlook, as reflected in management outlook statements; and
- We have seen a clear shift in interest rate expectations as we move through 2024.
Companies have hesitated to provide outlook statements due to uncertainty surrounding the economic outlook and the path for interest rates over the next six months.
The more cautious outlook forced analysts to downgrade their earnings per share forecasts by 5% for the 2025 financial year.
Similarly, the outlook for interest rates is less optimistic. Earlier this year, a broadly held view was that rates would be lowered over 2024, but this has now changed to rates being on hold for the remainder of the year.
This higher-for-longer view on interest rates impacts consensus views on companies’ future earnings, particularly in sectors like retail, building materials, and housing.
Dividends once again the shining light – and a reminder of why we invest
The good news from the reporting season was once again delivered in dividends. Many Kauri Wealth portfolio stocks rewarded shareholders with higher income payments compared with the previous corresponding earnings period.
Several of the highlights are:
Bank hybrid securities may no longer form the core of fixed-interest portfolios
In early September, APRA (the banking prudential regulator) proposed changes to the capital requirements for Australian banks.
These changes will remove one of the core allotments in clients’ fixed interest allocations – the hybrid security.
Hybrid securities are an unusual type of investment. They are a mix of fixed-interest returns and equity-type risk. Paying a margin over the 90-day bank bill, most hybrid securities currently pay an all-up yield (including franking credits) of between 6.5% and 7%.
However, the regulator is concerned about a clause that allows the hybrids to be converted to common equity during bank stress. In this scenario, hybrids can be converted to equity and written off against losses.
This is where the equity-type risks sit within the securities. Given retail shareholders (mainly SMSFs) are major holders of bank hybrids, the regulator is concerned investors do not fully understand this risk.
APRA’s proposal will see the end of banks issuing hybrids by early 2027. From this date, all existing hybrids will remain until their first call date (the maturity date), and no new bank hybrids will be issued.
Insurance companies (such as Suncorp, IAG, and Challenger) and other non-bank corporations will be able to continue issuing hybrids.
Sources: ASX, The Australian, Bloomberg, CBA, Morningstar, Minack Advisors, Westpac & The AFR
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
Email: russell@kauriwealth.com.au
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