The company reporting season in August 2024 wrapped up with overall results slightly better than market expectations. An analysis of the results also confirmed key market themes influencing performance. AFIC portfolio manager David Grace shares his reflections and insights on the reporting season, what it means for AFIC shareholders, and where we see continuing value in the market.
Key market themes we observed from the reporting season included balance sheets in good shape and operating margins that held up well across the board, reflecting many companies’ ability to manage costs despite persistent inflationary pressures. While volume growth was solid, the broader market is bracing for slower earnings growth moving forward. Our outlook on margin expansion is cautious, as we anticipate greater challenges in achieving growth in the current environment. This indicates that while companies have successfully navigated the current economic landscape, the rate of earnings growth across the whole market is set to slow from here.
We also saw resilient consumer spending. However, within this trend, there is a clear divide across demographic groups. Younger consumers, facing increasing cost-of-living pressures, are becoming more cost-conscious and more likely to be drawing from savings. The older demographic is in a stronger financial position, with noticeable upticks in discretionary spending, particularly on travel.
The labour market is showing signs of moderation, presenting widespread productivity challenges. Several companies announced headcount reductions as they navigate the high inflation environment. Capital expenditure (capex) costs remain elevated, which is a challenge for any company with large capex bills at a time when their earnings growth is forecast to slow, and this keeps us cautious on some sectors of the market.
We also continued to observe the ongoing trend of softening demand for resource companies, as China's policy initiatives focus more on steady recruitment and boosting consumer confidence rather than large-scale capital investment. The market remains keenly focused on any signs of improvement from China. Additionally, the political election cycle in several major markets is influencing company behaviour and performance, potentially delaying large-scale investments until there is greater certainty around policy and return on investment.
Sector insights: where we see value
Overall, the market valuation is above its long-term average. It is not extreme but there is wide dispersion across sectors. Investor sentiment has been influenced by the recent positive run across the market, driven primarily by multiple expansions rather than earnings growth; however, expectations that earnings growth will remain solid continue despite the reality of inflationary pressure. This has led to the valuation of some sectors being elevated relative to their own history and current valuation of the market.
We believe the banking and information technology sectors are currently over-valued, with the market willing to pay a premium for earnings safety in these industries even when the valuation is hard to justify. As part of our disciplined long-term approach, we have been trimming some of our holdings in banks where we believe valuations are stretched. We continue to manage risk by selectively realising gains in sectors that have become expensive relative to their earnings potential.
On the other hand, the energy and resources sectors present pockets of value, particularly in companies with strong balance sheets and operational resilience. While China's economic policy continues to create uncertainty, we remain watchful for any improvements that could unlock more significant opportunities in this space. We’ve continued to selectively add investments in these areas where value and growth potential align more closely.
Dividends continue to perform better than market expectations
One of the highlights of this company reporting season has been the strong performance of dividends, which exceeded expectations across several sectors. We are pleased with this outcome, as it reinforces our commitment to delivering growing dividends to our shareholders. Our consistent focus on companies with strong cash flow and balance sheet resilience means we are well-positioned to continue providing sustainable returns, even as market conditions evolve.
Stock spotlight
Companies in the AFIC portfolio that stood out during the reporting season are CarSales, Goodman Group, CSL, and ResMed.
CarSales, known for its robust online automotive marketplace, continues to demonstrate strong market leadership and innovation. Goodman Group, a leading global industrial property group, benefits from the growing demand for logistics and warehousing solutions driven by the e-commerce boom. CSL, a biotechnology giant, remains a cornerstone of our portfolio due to its strong earnings growth and leadership in the global biopharmaceutical market. ResMed, a global leader in sleep and respiratory care, has shown consistent growth driven by its robust product pipeline and expanding market reach.
We remain focussed on long-term investment
While the company reporting season offered slightly better-than-expected results, we remain cautious in our outlook. Valuations in certain sectors are elevated, and we believe that earnings growth will slow in the coming quarters. However, we continue to focus on the fundamentals: strong balance sheets, cash generation, quality management teams, and market leadership.
Our strategy remains focused on delivering sustainable returns over the long term. By remaining disciplined, cautious, and opportunistic, we believe we are well-positioned to navigate the challenges and opportunities that lie ahead.