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Australian Equity Strategy - End of FY2024 Review & Avoiding the Next Earnings Downgrade

Writer's picture: Royce AdvisoryRoyce Advisory

As we wrap up Financial Year 2024, investors in Australian equities face a landscape marked by earnings downgrades and economic uncertainties. Navigating these challenges requires a keen understanding of market dynamics and a proactive approach to portfolio management. Below we outline a few of the key issues that we are currently monitoring with our investors as we approach the next full year reporting season and remain cautious towards potential earnings downgrades.


Earnings Downgrades and Weak Orders


The cluster of earnings downgrades that began in mid-May 2024 is likely to continue, driven by weak orders and margin pressures. The NAB Business Survey has signaled weak orders, persistent inflation pressures, and rising transport costs, all contributing to negative earnings surprises. Companies with a high skew towards second-half earnings, such as Healius (HLS), Downer EDI (DOW), and Ramsay Health Care (RHC), are particularly vulnerable​​.



Impact of NZ Revenue Exposure


Companies with significant exposure to the New Zealand market have faced a wave of downgrades due to cost-of-living pressures, weak consumer sentiment, and housing market concerns. Stocks like Harvey Norman (HVN), oOh!media (OML), and ARB Corporation (ARB) have at least 10% of their revenue from New Zealand and are at risk of further downgrades​​.



Persistent Cost Pressures


Despite some slowing, labour costs remain relatively high, posing a threat to margins for companies with limited pricing power. Health services providers, such as Sonic Healthcare (SHL) and Ramsay Health Care (RHC), are particularly at risk. Additionally, rising shipping costs have added to the earnings headwinds, with the China Containerized Freight Cost Index up 44% since February 2024​​.



Sector-Specific Risks and Opportunities


Different sectors present varied risks and opportunities. For instance, while defensive sectors like Telecoms and Utilities face negative EPS revisions, cyclical sectors like Consumer Discretionary and Media are also under pressure. Investors should consider reducing exposure to stocks that have outperformed solely due to PE expansion, such as the major banks (CBA, NAB, WBC, ANZ), which face fundamental challenges​​.



Global Economic Influences


Global economic trends also play a significant role in shaping the Australian equity landscape. Central banks worldwide are beginning to ease monetary policies, but Australia's high inflation rate (3.8% YoY) compared to other developed nations limits the Reserve Bank of Australia's ability to cut rates soon. The economic trajectory of major trading partners, particularly China and the US, will influence market sentiment and investor decisions​​.


Call to Action


Navigating the complexities of the Australian equity market at the end of FY2024 requires informed decision-making and strategic adjustments. We are here to provide the guidance and support you need to make the right investment choices. Whether you need a detailed portfolio review or a discussion on market strategies, we are ready to help. Contact us to learn more and ensure your investments are well-positioned for the challenges and opportunities ahead.


DISCLAIMER


Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.


This communication is based on information from sources believed to be reliable at the time of its preparation (June 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

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