Finding opportunities during this crucial reporting season

This August reporting season will be the first time investors can see the impact of the pandemic on company profitability. The market may react in surprising ways, but the basics of investing remain unchanged.

Past is not the future

The ever-present investment warning says past returns are not a reliable indicator of future performance. This year proves the accuracy of that statement.

Earlier in the year, the Australian Securities Exchange (ASX) encouraged listed companies to review their published guidance about future performance. In response, many listed companies removed performance guidance altogether during this time of considerable uncertainty. As a result, this August reporting season will be the first detailed information on how companies are performing.

The market will undoubtedly react. Only a rash analyst will try to predict whether that reaction will be up, down or sideways. It is worth reviewing a few investment basics to equip investors to focus on genuine news and opportunities during a tumultuous season.

Fundamentals at the Fore¹

The Reserve Bank of Australia (RBA) believes the Australian economy is experiencing its most significant contraction since the 1930s Great Depression. Spending has declined. The ratio of employment to population is at its lowest level in many years. Exports of resources declined slightly, but the value of exported services such as education fell sharply as international borders remain restricted.

Yet the drop was not as deep as first expected. States with fewer restrictions have seen a return in retail sales. Government assistance, mortgage payment forbearance, historically low interest rates, rent reductions and withdrawals from superannuation are supporting households. Data suggests the worst of the job losses may have passed.

Some industries have adapted better than expected. The financial condition of larger Australian listed companies is also markedly different from other countries. The RBA observed that Australian companies tend to raise equity rather than debt due to unique features of the local market. By relying on capital, companies may be able to manage cash flows better through lower interest obligations and the lower likelihood for money to be withdrawn.

Few are predicting a V-shaped recovery despite the substantial, coordinated and unprecedented actions by governments. But there may be unexpectedly good, or at least less pessimistic, news during the upcoming reporting season.

Good News Dressed as Bad

From peak to lowest point this year², the S&P/ASX 200 Index lost approximately one-third of its value. That Index has since recovered slightly, with the current fall from the peak being 16%³. In other words, markets can overshoot reality.

Overshooting, or over-reacting to news occurs for different reasons including greed, fear and uncertainty. It is the result of the classic mistake of using short-term factors to value long-term assets.

The share market has factored into prices the short-term impact of the current health crisis. The long-term effect on individual companies is unknowable. The question for today’s investors is whether the market is continuing to emphasis short-term news over long term fundamentals.

The impact on some industries has been swift, brutal and expected, given the circumstances.. Given travel restrictions, for example, airlines have lost close to half of their value since the beginning of 2020. Other sectors are surprisingly resilient. The S&P/ASX 200 Metals and Mining Index, for example, has recovered to a high-water mark set earlier this year.

When looking for opportunities, it is easy for investors to overlook the role of expectations. A company might release good results, for example, yet see their share price fall. The fall could be a case of ‘buy the rumour, sell the fact’. Investors bought on the expectation of the good results and sold after the announcement to lock in gains. Conversely, the results may not have been as good as the market expected. Good news turning bad, relative to expectations.

To find opportunities during the August reporting season takes an understanding of the fundamentals, a clear financial plan, tolerance for market unpredictability and the right investment tools.

Ready the Tools

One tool may be a Leveraged margin loan facility, particular at current low interest rates. A margin loan gives suitable investors the capacity to respond quickly to new share market opportunities with an available line of credit arranged for this purpose.

It can enable investors to avoid any uncertainty or delays caused by transferring funds between accounts, leaving cash sitting idle in a trading account or needing to source funds.

This August will be unlike any other reporting season. Only prepared investors will be ready to act on the opportunities.

If you would like any further detail about how Leveraged margin loans can support your clients’ financial goals, please contact your Leveraged Relationship Manager or call us on 1300 307 807.

1. Minutes of the Monetary Policy Meeting of the Reserve Bank Board, July 2020.
2. Index peak on 21 February 2020 to lowest point on 20 March 2020.
3. Index peak on 21 February 2020 to closing index value on 24 July 2020.