- It’s time for a look at what’s happening in the world of corporate Australia.
- This profit reporting season is set to be a major turning point for the entire economy, according to analysts.
- Morgan’s predicts that companies will be adjusting to a new economic landscape and that there will be a noticeable shift.
Interest rates could impact company profits
The Reserve Bank’s recent interest rate hikes will affect some companies, but not all. The short-term impact of the hikes is actually good news for bank stocks. The Commonwealth Bank’s first-half results, due on February 15, will be an important company to watch. A lot of Australians bank with the Commonwealth Bank, so its results will give us a great insight into how households are coping with higher loan repayments and inflation. The bank’s results will provide a snapshot of how its clients are faring in terms of spending, lending stress, bad and doubtful debts, and whether or not the bank needs to support its clients more.
Some companies will feel the squeeze from higher borrowing costs, just like households. However, the full impact of inflation will not be seen yet, as consumers have only recently started to curb their spending. The first-half results, covering the period of July 1 to December 31, 2022, will show that consumer stocks are the big winners. Many retailers have already announced that they will be delivering strong results, despite expectations of an imminent slowdown and a drop in earnings expectations.
Retail sales slow over festive season
The latest retail trading data from the Bureau of Statistics showed a drop in sales of almost 4% in December, which is usually the busiest time for retailers. BHP, which reports its results on February 21, accounts for 10% of the Australian Stock Exchange and has the power to move the entire ASX if its share price swings dramatically. BHP is the biggest miner in the world and one of the biggest beneficiaries of higher commodity prices. It is also a barometer of consumption and growth, as it is a major provider of iron ore, copper, and other minerals. Copper is a good indicator of construction and industrial activity.
The US is giving us a good idea of what to expect from tech stocks this reporting season. The FAANG stocks have been hit hard, with companies like Microsoft, Amazon, and Meta laying off tens of thousands of employees due to rising costs. Australian company Megaport recently announced that it will be looking to reduce costs and bring in an external consultant to help with strategy. The company has also noted a slowdown in its spend. It is noted that the share price rally of some tech stocks in the US was not in line with company earnings, and a similar dynamic could play out in Australia. Given the weakness of the tech sector in 2022, there is a low bar for earnings, and some tech stocks may bounce back on the back of or in line with softer results.
China’s economy will continue to impact Australian businesses. Our biggest trading partner was mostly shut down for the first half of the financial year 2023, but with its sudden reopening in December, its economic movements will be reflected in company results in Australia. As Australian businesses deal with higher interest rates and operating costs, it is unlikely that they will provide solid guidance for the future. It is difficult for a CEO or board of directors to give guidance in such uncertain times. Many corporations may be more cautious about paying out dividends and may wait until the full-year results to do so, due to concerns about the outlook for the economy and the mortgage cliff, with many fixed-rate mortgages rolling off in the second half of the year.