The big investment lesson from 2015 was that the Australian share market can’t advance in the face of falling commodity prices. And so far in 2016, it has followed exactly the same path.

Although the resources sectors now account for just 15.9% of the S&P/ASX 200 (materials at 11.9% and energy at 4.0%), Australia is viewed from abroad as a commodity intensive market and lumped in the same category as Brazil and Canada. Brazil has lost almost 22% over the last year, while the Canadian market is down around 17%.

Over a similar period, the Australian market has lost 10.1%. It looks a bit better when dividends are included at 5.5%, but it is still a loss.

With oil finding some support around US$30 a barrel, iron ore around US$40 a tonne and copper at US$2.00 a pound, maybe a temporary bottom is forming. However, it is a brave call to say that this is the bottom, since this crash in commodity prices is driven by oversupply and the data says that there hasn’t been that much of a pullback in supply yet.

Aussie institutions can’t afford to be long resource stocks 

Australian fund managers don’t get paid to take material risk, let alone standout from their industry peers. With the all-powerful asset consultants guiding the trustees of the major industry and retail super funds, being wrong with volatile resource stocks is a sure way to lose those institutional mandates. Everyone knows (in hindsight) that we are in a bear market for commodities. If a fund manager goes against the crowd and is overweight resource stocks, they are going to be “crucified” if they are wrong. Accordingly, most fund managers are underweight resource stocks - and will stay underweight resource stocks until the bottom in commodity prices is well and truly evident.

Weaker commodity prices also correlate to a weaker AUD. Offshore fund managers, who in the main don’t need to invest in the Australian share market, sit on the sidelines and will stay away from investing in the Australian market.  

In this environment, it is not surprising that the Australian sharemarket suffers and has trouble hanging onto gains. In bouts of bearishness, the banks and other financial stocks get hit hard (because they are so big in market capitalization and there is nothing else to sell), whilst the relative safety of utility, health and infrastructure stocks is seeing prices on some stocks being pushed to all-time  highs.

For our market to head higher, we need commodity prices to bottom first. We need offshore buying support, and our local fund managers to move away from their current “safety first” approach.

Reporting season can also help

Just as the US market could enjoy a catalyst from a better than expected reporting season, the Australian market also needs a strong reporting season. For the non resource companies, top line revenue growth will be the attribute most keenly sought, as while Australian management has shown that it is reasonably adept at “squeezing the lemon”, you can’t keep on doing this indefinitely without some impact to revenue. The market will pay a premium for those companies that can grow revenue.

The reporting season officially gets underway next Thursday when Tabcorp, Downer EDI and Macquarie report, the latter with a quarterly trading update. It picks up momentum, peaking around Wednesday 17 February, and closes on Monday 29 February (the last date for companies with a 31 December or 30 June balance date to provide a half yearly update).

Of the Banks, Commonwealth Bank is due to report on Wednesday 10. A key focus will be whether CBA has been able to return to “positive jaws”, that is, the rate of revenue growth exceeding the rate of expense growth. Bad debts should again be low, although it will be interesting to see whether there is any increase in provisions for the resources sector. NAB is due to provide a first quarter trading update on February 16, while ANZ follows on 17 February. Bendigo and Suncorp will report half year results.

Telstra has, in a relative senses, been one of the better performing stocks this calendar year, losing 1.4% compared to the market’s 6.6%. It has guided for the full year mid single digit growth in total income, low single digit growth in EBITDA and free cash flow of $4.6bn to $5.1bn. The market will be keen to see how it is faring in the mobile phone war and what is happening to margin, and in a broader sense, whether its transition to ”a world class technology company” is translating into any real revenue growth.

The major retailers will report towards the end of the month, with Wesfarmers on Wednesday 24 February and Woolworths on Friday 26 February.  Almost as important as the bottom line reports will be the accompanying sales figures. In supermarkets, Wesfarmers (Coles) has been killing Woolworths. Last quarter, comparable store sales for Australian food and liquor grew by 3.6% at Coles, while over at Woolworths, they fell by 1.0%.

With the resource companies, RIO kicks off the reporting season on Thursday 11 February, with BHP due to report on Tuesday 23 February. While write downs will probably get the media attention, with BHP expected to post a net loss for the period, the market will be looking at progress on cost reduction and productivity initiatives. Their forward looking statements will be critical, particularly guidance around their production costs. For BHP, expect the progressive dividend policy to go.

The same is true for the energy companies (Santos, Woodside, Origin and Oil Search), where the forward looking statements and guidance around financial strength will for the market be much more important than the earnings result.

Major companies' reporting dates

Thursday 4 February: Tabcorp

Monday 8 February: JB Hi-Fi

Wednesday 10 February: Commonwealth Bank

Wednesday 10 February: Computershare

Thursday 11 February: Rio Tinto

Tuesday 16 February: CSL

Wednesday 17 February: Amcor

Wednesday 17 February: Woodside

Thursday 18 February: Origin

Thursday 18 February: Telstra

Friday 19 February: Santos

Monday 22 February: Brambles

Tuesday 23 February: BHP

Wednesday 24 February: Wesfarmers

Thursday 25 February: Ramsay Health Care

Thursday 25 February: Westfield

Friday 26 February: Woolworths

 

@PaulRickard17