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'Earnings bonanza' predicted as companies tighten the screws

Monday, 23 Jan 2017 17:21:14 | Carrington Clarke

Investors watch the share price indicator board at the Australian Stock Exchange in Sydney, November 20, 2006. (Greg Wood, file photo: AFP)

Bank of America Merrill Lynch is expecting a bumper year for Australian stocks and has predicted the ASX 200 will hit 6,100 by the end of the year.

That would mean a 9.2 per cent gain on today's numbers and an 11 per cent total return including dividends.

By comparison, last year the ASX saw a 7 per cent gain which was the strongest result since 2013.

Merrill Lynch analyst Sameer Chopra expected an "earnings bonanza", predicting companies would post bumper numbers in February's reporting season.

It is predicated on a continuation of the cost-out agenda of the big end of town, as chief executives continue to tighten the screws.

Although it has been a consistent theme of the past few reporting seasons, Mr Chopra said 20 per cent of ASX 100 stocks had early to mid-stage cost-out programmes in train.

"Service companies, which make up 60 per cent of our market cap, are still in the very early stages of their cost-out programs, so I think we have a long way to go," Mr Chopra said.

But this comes with a potential risk to the economy.

As companies rein in spending, it could dampen demand in an already fragile economic environment.

Mr Chopra was not too concerned.

"We've seen the cost-out in the resource sector and the economy was able to handle that in part because of the boom in the construction industry," he said.

"I'm expecting that's the trend we will see, that the economy can deal with this significant rebalancing."

Australia to benefit from China's push for cleaner fuel

Mr Chopra predicted Australia would benefit from China's supply-side reforms as they target pollution, efficiency, and quality.

Australian resource companies should benefit from the Chinese authorities push for cleaner fuel.

Australia's coal resources are relatively clean when compared to China's own, although in the longer term, coal will suffer from a push towards renewable energy sources.

Technology is at the heart of the savings measures as companies move towards automation and clamp down on labour costs.

"We have emergence of the app economy and it's still in the very early stages here in Australia," Mr Chopra said.

"As it manifests itself, I think you'll see changes in the costs structure and how companies go to market."

This might not be great news for some workers but Mr Chopra said he believed it would be positive for shareholders.

But it is not all positive news. Mr Chopra predicted that bond proxies like telcos and utilities would be hit hard as the great bond rally continued to unwind.

He also highlighted risk in the housing market, stating that prices are currently 15 per cent above fair value.

AustraliaPlus


 

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