Reporting Season Wrap Up

The domestic profit reporting season was slightly weaker than expected, while softer guidance from corporate Australia has resulted in a small reduction to the overly optimistic earnings forecasts for this financial year.

According to Bloomberg, half of the companies reporting beat analyst expectations, while 48.7% missed expectations and the balance were in line. Earnings surprises were worst among the Energy sector and the Materials sector, which recorded results 14.6% and 9.7% below expectations, respectively. Prior to reporting season, the implied growth rate for consensus estimates of earnings per share (EPS) for the 2015 Financial Year was 0.8%, however, at the conclusion of reporting season, EPS growth was negative 1.8% year on year, largely due to the lower commodity price impacts on Resources and Energy.

Once again dividends grew at a faster rate in the 2015 Financial Year than earnings. The above mentioned EPS growth of -1.8%, was dwarfed by dividend per share (DPS) growth of 4.6%. This was particularly evident among Resource stocks, where EPS shrunk 25%, but DPS grew 4% due largely to BHP's dividend policy. For the broader share market, EPS has grown a marginal 5% since FY11, but dividends have soared by 25%.

The recent falls in the domestic market have been compounded by large share issuances from some of the major Australian banks due to increased capital requirements. During August, a $5 billion capital raising from Commonwealth Bank and $3 billion from ANZ, followed National Australia Bank's $5.5 billion raising in May. Despite their price corrections, the Australian Banks are unquestionably among the strongest in the world and in terms of pricing and yield; the recent falls represent relative value and we have topped up our Bank holdings.

At Ausbil, we have concluded that there are pockets of real opportunity starting to appear in the Australian share market and we are taking advantage of these situations as they arise. We firmly believe the extent of the recent share market correction has been overdone and that more and higher quality investment opportunities are starting to present themselves in different sectors.

Our investment strategy remains largely unchanged. Our key thematic approach has been to favour international earnings streams, (particularly from the US and Europe), housing related sectors and high yielding sectors with earnings growth. In this period of sustained Australian currency weakness, we continue to target a series of Australian companies that will benefit significantly from underlying global growth and the strong US dollar. We are also maintaining a cautious approach to Resource stocks as commodity prices remain subdued and we are starting to see potential opportunities in the Energy sector following the significant fall in the oil price.

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