Going into the August reporting season, the market has softened earnings expectations for companies. Declining commodity prices, a higher dollar than many had expected and a budget related decrease in consumer spending and sentiment were all drivers of the weaker forecasts.
One bright spot in the economy however was the recovery in house prices and construction, which finally began to ramp up in the second half.
Similar to first half we expect to see only minor top line improvement in many companies, with the majority of the heavy lifting in relation to earnings improvements coming from internal cost outs and efficiency programs. Given the share market highs, prices will be highly vulnerable to any earnings misses but this will largely revolve around 2015 expectations with most companies already guided to 2014 results. Companies that demonstrate revenue growth will be rewarded given the scarcity.
A key focus for Dalton Nicol Reid this reporting season will be assessing the outlook for the market to hit the 2015 growth forecast. The market is currently anticipating 8% growth.
We do expect a pick up in company margins for those companies that see growth return to their top-line and beginning to benefit from their cost cutting and efficiency programs of prior periods. Many companies have also been de-gearing and the combination of healthier balance sheets, low interest rates and scarcity of top line growth could lead to a pick-up in M&A.
Given this backdrop we are looking for a select set of investment characteristics. Valuations have now normalised and our focus will be on earnings which we believe will drive returns going forward. Therefore our reporting season watch list includes:
About Dalton Nicol Reid
Founded in 2001, Dalton Nicol Reid is an independent Australian investment management company that delivers client-focused, quality, investment solutions to institutions, advisers and individual investors.
Rated by both institutional and retail asset consultants for our specialist expertise in managing Australian equities, we are a pioneer in the delivery of individually and separately managed accounts in the Australian market. Our position as Australia’s leading provider of Individually Managed Accounts reflects our commitment to excellence and the value we place on partnering with clients to deliver quality investment solutions.
We aim to deliver investment out-performance. Our experienced and dedicated investment management team delivers clients an unparalleled level of service, be they large institutions, advisers or individual investors.
Dalton Nicol Reid is a signatory to the Principles for Responsible Investment (PRI).
IMPORTANT NOTE: This information has been prepared by DNR AFSL Pty Ltd ABN 39 118 946 400, an Australian Financial Services Licensee, Licence Number 301658. Whilst, Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. This document is not intended to provide you with personal advice and in providing this information, Dalton Nicol Reid has not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser. Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this document. Past performance is not indicative of future performance. Total returns shown are based on Dalton Nicol Reid’s model portfolio and have been calculated before taking Dalton Nicol Reid’s fees into account. No allowance has been made for taxation.