Let the earnings landslide begin
Median change in earnings expected to be increase of 6.9pc, unemployment low, consumer spending stable
Despite all the doom and gloom, I think our market is in reasonable
shape.
The reporting season kicks off in earnest this coming week, and we can expect a plethora of releases across the NZX. About two-thirds of the companies on our market will report earnings through August and September, with a logjam over the next fortnight.
Of those due to announce results, about 70 per cent are forecast to see profits improve on the previous year. The median change in earnings is expected to be an increase of 6.9 per cent. That’s respectable, if unspectacular.
While a few cracks have appeared in the economy, the first six months of 2022 were generally solid. Export commodities prices have been high, unemployment very low and consumer spending stable.
However, we’ll also hear a lot about rising costs, labour shortages and higher interest rates. Pleasingly, the bulk of our listed companies have strong balance sheets, which means they have limited direct exposure to rising borrowing costs.
A weaker currency will have been helpful to some exporters. The NZ dollar has been particularly weak against the US dollar, falling 7.5 per cent (on average) compared to the same period in 2021.
At the same time, this reduced buying power will have put added pressure on input costs for others.
Outlook statements will be a focal point, and with plenty of uncertainty ahead comments from management teams could be guarded.
The economy is expected to slow, interest rates are likely to rise further and unemployment is forecast to increase from the current low levels.
The NZX 50 index is down about 10 per cent in 2022, although it’s staged a strong rebound in the past two months. At one point in June, it was almost 19 per cent below where it started the year.
However, share prices for 40 of the 50 companies in the index are still in negative territory year-to-date. Almost half are down at least 15 per cent, while 10 are more than 25 per cent lower.
While some of these declines are justified, it means the bar is lower for these businesses so we might see a few surprising share price reactions.
As we saw with some US companies during July, lacklustre results can still make for positive share price moves, simply for being better than feared.
Despite all the doom and gloom, I think our market is in reasonable shape.
It’s important to remember that shares look forward, and they’re often running some 12-18 months ahead of where the economy is at any point in time.
It’s also somewhat comforting that the local sharemarket peaked in
January 2021, 10 months earlier than world shares (and the housing market, for that matter). Hopefully, that means we’re a little further through this period of weakness.
Our Reserve Bank started its monetary tightening process much earlier than others too. It halted its asset purchases in July last year and started hiking interest rates three months later in October.
Other central banks were much slower to react, and are still in catchup mode. We’re closer to restrictive territory than most, so you could say we’ve taken more of our medicine at this point.
The next few weeks will provide a great opportunity to take the pulse of corporate New Zealand, and some earnings reports will teach us more about where the economy is headed than any statistical releases.
Mark Lister is the investment director at Craigs Investment Partners. The information in this article is provided for
information only, is intended to be general in
nature, and does not take into account your
financial situation, objectives, goals, or risk tolerance. Before making
any investment decision Craigs Investment Partners recommends you contact an
investment adviser.