Rate cut needed to buoy local stocks

08-Mar-2016

By James Dunn

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While the latest profit reporting season appeared to have turned out better than feared, with more companies beating market earnings expectations than misses, active equities manager Platypus Asset Management found the season largely neutral.

Platypus chief investment officer Don Williams said it was “one of the more random” reporting seasons he had experienced, with some good numbers getting “hammered”, while some “bad numbers” were supported by the market.

In a recent webinar, Williams described the season as “symptomatic” of the economy.

“It’s still quite a tough environment for many companies,” he said.

“There were only a couple of sectors, the consumer discretionary sector in particular, and healthcare, that had reasonable numbers, but most other sectors struggled to generate earnings growth.

“While companies are doing a good job cutting costs, we still think the economy needs a bit more stimulus.

“For the stock market to deliver 10 per cent earnings-per-share growth, we would need a much stronger growth pulse in Australia.

“Even though we just printed a 3 per cent GDP (gross domestic product) growth number, I don’t think many people really believe that number.”

He expected the market to perform “a little bit better than last year”, but if the economic pulse did not improve, he said, the Reserve Bank of Australia might have to cut rates further.

“Once that occurs, with the lower cost base across most industrial companies, we’ll get a very different earnings picture,” he said.

“I’m not particularly bearish: I think in the second half investors will see a capital return out of Australian equities.”

Platypus portfolio manager Prasad Patkar said that in the prevailing low-growth, low-inflation operating environment, companies that could grow their earnings irrespective of the economic conditions would maintain their rating, or be re-rated.

“But it’s getting harder to find those franchises,” Patkar said.

“For us to construct a portfolio of between 20 and 40 names, it’s a relatively good time for us to be doing that: those situations will get re-rated, and we only have to find 20 to 40 of them.”

In terms of companies that impressed, he said JB Hi-Fi brought out a “very solid” result, while hearing device maker Cochlear stood out, and Domino’s Pizza continued to deliver consistent growth in like-for-like sales in mature markets like Australia, New Zealand and France, and in expansion into new markets, such as Japan and Germany.

Disappointments included Crown Resorts, Telstra and Wesfarmers.

In portfolio terms, Platypus was buying Cochlear for the first time since 2011, as well as liver cancer treatment device maker Sirtex Medical.

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