Analysts' Intelligence

Mixed signals on the ASX

31 Mar 2022 2 month(s) ago

One broker believes the market is in a mid-cycle slowdown.

World wide stock markets seem to be moving into a more defensive phase. According to Macquarie there are signs of emerging inflation affecting particularly cash flow, even though profits seem sound enough with big companies.

The picture is ambiguous:

“Reporting season was mixed, with modest positive surprise and upgrades for larger companies. This helped to support our aggregate FY22 earnings per share growth at +13.4%. But small caps were more likely to miss and have their FY22 EPS downgraded, as they tend to have less pricing power and may be more negatively impacted from the withdrawal of stimulus.”

There do seem to be gathering storm clouds on the inflation front, which is affecting companies' cash flow:

“Inflation was a key theme in results and one impact appears to be Free Cash Flow disappointment due to some combination of lower margins, higher interest and tax or higher working capital. Inventories in particular were higher than expected due to supply chain challenges and we still see this as a potential risk as the cycle slows. Cash flow surprise was also the most important driver of post-result share price moves, not earnings per share surprises.”

Macquarie argues that growth is weaker than many think, and that we are in a mid-cycle slowdown. The US Federal Reserve is looking to raise interest rates, which will affect Australia:

“This leads us to a more defensive bias. On this we think Staples Retail had the best results of the season and should benefit from food inflation. Health had disappointing results, but post-result outperformance suggests rotation to the sector which often tends to perform well in periods of market volatility. For exposure to these sectors our analysts prefer Outperform-rated COL and CSL.”

Macquarie believes the pandemic has become endemic, and identifies stocks that benefit from re-opening”

“ASX 100 stocks that benefit from reopening and rated Outperform are QAN, CTD, TCL, ALX, SGR, DXS, GPT, IEL and CSL. Stocks that could face headwinds include HVN, JBH, ANN, SHL, NEC, REA and DMP as they all posted 1H22 results more than 10% ahead of our pre- COVID forecasts (which suggests they may be over earning).”

Macquarie’s advice is to buy stocks that can post real growth:

“Over 40% of companies that had quantitative guidance in the market raised their guidance during reporting season. This suggests there had been some conservatism in guidance and given ongoing COVID and inflation challenges we think there could still be some conservatism baked into company forecasts. ASX 100 companies rated Outperform that guided to 2022 growth >5% and raised guidance in February were CHC, SEK, JHX, SDF, NXT and CPU.”


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