In November 2007, the Australian share market hit a high of 6828.7. Yesterday, almost 11 years on, the S&P/ASX 200 closed at 6352.  

A key characteristic of a bull market is that it takes out the previous high to make a new high. More than nine years past its GFC lows and despite fantastic leads from Wall Street, the Australian share market still languishes. Stuck in a seamless grind higher, the question remains as to what will power the local market to make a fresh high? Has the company profit reporting season, which wraps up tomorrow, been “good enough” to give the market the momentum it needs? And if it won’t come from accelerating company earnings, what could take the market to 7000 by year’s end?

Let’s review the strength of the August company reporting season, the time companies report full year or half year profits and provide guidance about their prospects for the next 6-12 months.

It has been good, but not brilliant.

According to AMP Capital’s Shane Oliver, who has analysed the data with 85% of companies reporting, 47% have “beaten” market expectations (blue bar below). This compares to a “norm” of around 44%. Misses, companies reporting worse than expected, is only 22% (red bar below).

Breadth of profit increases is high, with 79% of companies reporting higher profits than a year ago (blue line below), compared to a norm of 66%.  Most companies (86%) have increased or maintained their dividend (red line).

Overall, earnings growth for 2017/18 is on track to come in around 9%, with resources earnings up 25%, thanks to the increase in commodity prices and the rest of the market seeing growth of around 5%. While the overall 9% growth rate is better than expected, it is a long way short of the 24% growth US companies achieved on average in the last quarter.

A highlight of the season is that the so-called “growth” companies, those trading on high price earnings multiples and expected to grow earnings more rapidly, have on the whole delivered on pre-result expectations. This includes highflyers in the IT sector, such as Altium, Afterpay, Carsales, REA and WiseTech Global; healthcare leaders such as CSL, Cochlear and  Resmed; and consumer goods leaders such as a2 Milk, Bellamy’s and Blackmores.

Other key themes to emerge are consumer discretionary stocks are benefiting from a stronger domestic economy and performing satisfactorily; resources companies are being  challenged by rising costs (energy, raw materials and labour) and that profit growth in the future will be dependent on commodity price increases rather than productivity and production gains; and revenue growth in the financials sector is anaemic.

Electoral risk rises

In the midst of reporting season, the Liberal Party chose to dump Malcolm Turnbull as Prime Minister and give Scott Morrison the gig. If ScoMo can successfully smoke the peace pipe with the conservative right, the Government might survive to fight an election on Saturday 18 May 2019, the last possible day that a half Senate election can be held in conjunction with the House of Representatives. And if he can re-invigorate the Government, he might even beat Bill Shorten at the election.

But he first needs to win a by-election in Wentworth, win over at least one National MP who has threatened to sit on the cross-bench, and mend fences with independents Cathy McGowan and Bob Katter, who have previously agreed to vote with the Government on supply and confidence motions. The prospect that ScoMo will lose a no-confidence motion and be forced to call a pre-Christmas election is real.

Electoral risk is now very “front of mind” with investors. Federal elections are typically a negative for markets due to the uncertainty around policy, and the impact on consumer facing businesses where purchase decisions are sometimes deferred.

Exacerbating the concern over the election is the suite of “investor unfriendly” policies that Bill Shorten and his ALP team have already announced. To recap, these include:

·         Reducing the discount on capital gains from 50% to 25%. Taxpayers on the top marginal tax rate of 47% will see their effective tax rate on a capital gain on an asset (property, shares, managed funds, collectables etc) owned for more than 12 months increase from 23.5% to 35.25%;

·         Abolition of negative gearing, except for new housing;

·         Eliminating cash refunds of excess franking (imputation)  credits (except for those in receipt of a government benefit);

·         Capping premium increases on private health insurance to 2% pa; and

·         Reducing the cap on non-concessional super contributions to $75,000 pa, abolishing catch-up concessional contributions and lowering the threshold to $200,000 for Division 293 tax (the extra tax high income earners pay on concessional super contributions).

7000 by Christmas?

I can’t readily see 7000 by Christmas. Reporting season was good, but not brilliant and the events of last week with Scomo and Turnbull mean that the markets will be keeping one eye firmly glued on Canberra.

If the US market continues to power ahead, then the Aussie market will be dragged higher. The former seems only to be held back by trade tensions and the fear of higher interest rates. News that the US and Mexico have come to an agreement to replace NAFTA and that Canada is due to resume talks has eased short term market concerns. Europe is said to be getting ready to do a deal, meaning that the big one, the $200bn spat between the US and China, could be the next area to be resolved. If China and the US call a truce, Wall Street will go nuts – a 500 point rally could be on the cards, with our market to follow.

In President Trump’s hands we lie?