Based on this year’s reporting season results and guidance released to date, investors can expect better results for the 2017 financial year as more companies progress through the difficult process of exiting businesses and restructuring operations, says David Bryant, CEO at Australian Unity Investments.
"Across the market as a whole, company earnings for the financial year 30 June 2016, are down on the previous year by around 8 percent, but this reflects the major impact of resource companies where average earnings fell 48 percent. Excluding this, company profits have grown around 5 percent this financial year.
"The big write downs we saw this year, largely in resource companies, shouldn’t be repeated in the 2017 financial year.
"Overall it has been a fairly stable reporting season, without too much unexpected bad news."
Mr Bryant said if the growth forecast for next year of 6-7 percent is achieved investors should be kept reasonably happy, particularly given the shrinking number of alternative investments given record low interest rates.
"However, we are likely to see continued pressure on dividend yield which will concern some investors, particularly in certain sectors.
"Investors still need to embrace equities, but they need to be very selective in companies and sectors they invest in.
"The resources sector results have been very poor, as expected, and the banking sector is struggling to deliver much growth given low rates, strong competition, and increasing bad debt levels.
"That leaves only around 40 percent of the market to work with, and as this profit reporting season has shown there is a big gap between the best and worst companies.
"If you contrast stocks like Qantas, who embarked on their Transformation program two years ago after a reporting significant write-offs, today they are showing the benefit of that work.
"Companies like Wesfarmers and Woolworths are tackling those issues, but we are in the midst of the write-downs and restructuring work, so their improvement is realistically a year or two away yet.
"The message from reporting season so far, is that investors will need to continue to have lower expectations of returns for the rest of 2016, as low interest rates and limited earnings growth prevail.
"As a result, investors need to be more well-researched and selective than ever, because the easy option of just investing in resources and banks is gone, and the winners and losers in the next couple of years will deliver substantially different outcomes for investors."
For more information please contact:
David Bryant CEO, Australian Unity Investments
T: 03 8682 4550