Tuesday 4th February 2020
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Australia’s biggest companies face a difficult reporting season as signs of a recovery in the domestic economy toward the end of the year have been overshadowed by raging wildfires and a global health emergency arising from China.
A pickup in retail spending and better-than-expected unemployment data in the December quarter was seen to have helped firms exposed to the domestic economy, according to Citigroup Inc. analyst Craig Woolford. Still, Australia’s unprecedented wildfires and the spread of the novel coronavirus, which has prompted the U.S. to tell citizens not to travel to China, are casting a pall over the outlook for 2020.
“We’re not talking about amazing conditions, but we are talking about improvement” toward the end of 2019, Woolford said. Even so, ongoing uncertainties have created “a tricky situation for management in terms of what outlook they’re prepared to make about the second half, given a quite turbulent start to the calendar year.”
It’s unclear how severe the damage from the virus outbreak will be, but it will impact tourism and consumption, sectors already reeling from the fires. Traders have also warned short-term forecasts for commodities might be upturned if manufacturers in China stay closed for an extended time.
While the emergence of the coronavirus from China has occurred after the end of the reporting period, investors will be looking for any commentary from companies that might be impacted including airlines, travel firms, airports and the education sector.
The outbreak, which originated in Wuhan, the capital of Hubei province, has more than 20,000 confirmed cases and a death toll of 425 in China, the nation reported.
The virus has been detected in about two dozen countries and a number of airlines have halted flights to the nation as a result. Qantas Airways Ltd., Australia’s largest airline, said it will suspend services to mainland China from Feb. 9.
Flight Centre Travel Group Ltd. also posted the biggest percentage increase in bear bets among the most shorted stocks on Australia’s benchmark index amid worries over the virus, according to the most recent Australian Securities and Investments Commission data compiled by Bloomberg.
Fires sweeping across the world’s driest inhabited continent have destroyed thousands of homes and burnt a land area almost the size of England. The unprecedented wildfire season is likely to drag on the nation’s economy and may threaten Australia’s reputation as images of smoky skylines and charred wildlife are broadcast globally.
Companies like Super Retail Group Ltd., which owns camping and outdoor brands, highlighted fire-related pressure last month. Trading conditions will return to normal levels at some point, but the retailer isn’t likely to provide many clues as to when, Morgans Financial Ltd. analyst Josephine Little wrote last month.
While Ingenia Communities Group -- which operates camping and caravan accommodation along Australia’s east coast -- has also warned earnings will be affected as customers were asked to leave at the height of the fires.
The gaming industry may also be affected indirectly as tourists cancel trips amid concerns about the wildfires. While it might crimp casino revenue in the short-term, direct impact on the sector is likely to be immaterial, UBS Group AG analysts wrote in January.
“There’s less investor patience with anything that sounds like a miss or looks not as strong as expected” after the benchmark index hit a fresh high in January, said Karen Jorritsma, head of Australian equities at RBC Capital Markets.
Investors have punished companies that flagged profit warnings ahead of the reporting season. Treasury Wine Estates Ltd. posted its biggest one-day loss on record after it missed earnings targets for the first-half and lowered guidance for the full-year. Engineering and construction firm Cimic Group Ltd. also plunged after writing down its stake in a Middle East construction company by A$1.8 billion.
Still, disappointing results may not derail the overall market as record-low interest rates continue to buoy equities. Signs of an economic recovery in the U.S. are also expected to support Australian stocks in the first half of 2020, Macquarie Group Ltd. analysts wrote in a Jan. 22 note.
Investors will be looking at property-exposed stocks to see if the benefits from a reignited housing market are prompting increased spending from consumers.
“When house prices go up, a wealth effect starts to kick in,” said Randal Jenneke, head of Australian equities at T. Rowe Price Group Inc. The market’s turnaround “is going to underpin an improving consumer and really help growth over the course of 2020.”
Companies like Wesfarmers Ltd., owner of home improvement store Bunnings, and online property listing services may shed light on whether improved housing data is translating into activity. The number of residential contracts exchanged by developers will also help investors assess the health of the market, with expectations they will ramp up volumes amid revived prices.
Home prices in December notched their biggest three-month gain in a decade, marking a reversal from the downturn at the start of 2019. The latest housing data from January show that the property resurgence is spreading, with prices rising in every major city.
The technology sector faces a challenging year, as companies try to navigate scope for growth, potential regulatory changes and offshore short sellers in a fully valued market.
The key focus in 2020 is whether they can increase subscribers, sales and free cash flow generation amid heightened valuations, RBC analysts led by Garry Sherriff wrote in a Jan. 17 note. Nearmap Ltd., which provides geospatial mapping, lost almost a third of its value after cutting guidance amid increased churn in the U.S.
Expect volatility to persist. Last year, short-seller attacks on WiseTech Global Ltd. and a financial crimes audit on Afterpay Ltd. jostled the sector. In 2020, the threats are in the U.S. -- a presidential election and regulatory inquiries into American tech firms could rattle Australian shares, RBC analysts wrote.
The growing buy now, pay later sector may also face changes under an industry-wide draft code of practice. Afterpay, FlexiGroup Ltd.‘s humm and other providers will cap late fees and introduce tougher customer screening standards under the Australian Finance Industry Association’s proposal.
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