Five insights from reporting season

1. The strong reporting season is a good sign for the economy

The first-half reporting season was one of the strongest we've seen in a decade or more, with a significant number of companies beating earnings expectations. This was partly driven by fiscal stimulus, as well as elevated commodity prices, including iron ore and copper. We saw companies keeping costs under control and revenue lines in good order. Given the challenges we faced a year ago when the pandemic struck, it was a very positive set of results.

2. Volatility is up, but it’s not a concern

We have seen higher volatility in markets over recent months, but are not troubled by it.  One way that the volatility has been expressed is in US 10 year bond yields, which is the key interest rate that we focus on. They've risen from around 50 basis points in August 2020 to around 160 basis points in March 2021^[1].  

However, this is a positive sign that the underlying economy is improving, both here and in the United States, where the Biden administration has approved a huge stimulus package. Markets are now largely focused on the pace of the recovery out of COVID, rather than wondering if the economy will worsen.

3. Construction pick up will have flow-on effects

While the various government stimulus schemes for home building were announced last year, we are only now just starting to see the activity accelerate. And apart from residential construction, we are seeing an increase in CapEx intentions for non-dwelling construction. This will support companies in our portfolio, such as Bluescope Steel, which continues to benefit from the portfolio restructuring it has undertaken over the past decade.

4. Aussie banks are in a good place

We had been underweight banks in our portfolio, but have added to our positions over the past six months. We believe that the banks are well-positioned at this point – as the economy accelerates, credit growth and margins are starting to improve. They have their costs under control, and are conservatively provisioned for any increase in bad debts.

We expect the banks to increase their dividends over the course of the next eight months, making up for the lower payouts made during the COVID period of uncertainty in 2020.

5. The ASX is more than just banks and miners

While banks and many miners have indeed performed well in the past year, they are not alone. Australia has truly has some great companies to invest in outside of those sectors.

For example, some of our technology companies have well-established technology and are now showing their ability to compete globally e.g. Afterpay, Wisetech and Xero - all of which have been key drivers of our strong performance over the past 12 months. They are a natural sequel to the success of industrials (eg James Hardie, Brambles, Amcor) and healthcare (e.g. CSL, Cochlear, Resmed) who have previously shown Australian companies’ ability to excel internationally.

^{[1] Source: Bloomberg – 10 Year US Bond Yields}