2023 reporting season marks a ‘cleansing opportunity’: Tribeca

The upcoming reporting season will probably be one of the most volatile and interesting for Australian equities, according to Tribeca portfolio manager Jun Bei Liu.

Over the next few months, she expects to see big and, in some cases, surprising price movements on the Australian equities front.

“As an investor, we love reporting seasons like this. We’ve been waiting for earnings downgrade and rebasing for the last six months,” she said.

“For share prices to move higher, you need a stabilisation valuation and you need earnings to be realistic. We are hoping this reporting season everyone’s earnings will be realistic for the next 12 months, and then we can grow from there. 

“If it doesn’t, then you’re talking about AGM season which is in October when everyone has to downgrade. We are waiting for this cleansing opportunity to buy some of these companies because it’s a fantastic opportunity.”

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Liu, portfolio manager of the Tribeca Alpha Plus fund, believes Australia is on the cusp of a real slowdown, given consumers have more demonstrably begun to feel the pinch in the last 1.5 months.

According to the Australian Bureau of Statistics, household spending on discretionary goods and services was 0.6 per cent lower in May compared to the same period last year.

CPI inflation slowed in the June 2023 quarter with a rise of 0.8 per cent, the lowest quarterly rise since September 2021. Over the 12 months to the June 2023 quarter, the CPI rose to 6 per cent. 

With this, she expects Australia to enter a similar phase as US markets were 12 months ago.

Liu noted: “I know consensus and analysts have been downgrading earnings, but it’s never enough when it’s falling.” 

She outlines three key themes that will come into play going into the reporting season, namely cost escalation, top line demand and leverage.

“I know most companies have talked about cost pressure for the last 12 months, but we do think that will continue to drive the outlook for margin, and we expect downgrades on that front. Labour is going to be a key point of the cost stickiness,” Liu said.

“Some of the sectors like banks, and companies which use a lot of labour, are going to be more negative in terms of cost outlook and downgrades. On the retail front, businesses with a lot of shops, like, say Flight Centre, might talk to the escalation in costs.”

Previous market commentary has identified sectors like insurance and utilities as potential bright spots in their ability to pass on costs to the consumer, but Liu remains wary of jumping on that bandwagon.

“It’s going to be much harder for companies to pass on costs. In May, a majority of companies said they have already done the big price increase and now they’re going to wait,” she told Money Management.

“When things get bad enough, people will drive less. Even with insurance, people will start shopping around, trying to find the cheapest option. In terms of energy, they may start using the aircon or heater a bit less.”

It means, while most companies have managed to pass through price increases and maintain volume growth for now, it might not translate to a strong performance in the following financial year.

“We do expect the outlook for 2024 and trading update of many consumer-facing companies are going to be quite challenged. Particularly, many of their share prices have recovered recently in the last couple of weeks, thinking maybe things are not as bad, but the trading update is going to be very challenged. Even on the leisure front, there is softening in terms of outlook.”

On leverage, Liu observes some sectors are highly leveraged and with interest rates up, they will get caught short.

“Some of the companies will hopefully have done their prudent hedging profile for interest rates, but many haven’t. One sector that comes to mind is the listed property sector which is going through an interesting transition at the moment. 

“We’ve seen valuations for commercial property fall significantly and yet many of those property companies haven’t downgraded their valuation, but they will at this result given we have seen some transactional evidence taking place at the end of June.”