Tough market: People walk past a CBA branch in central Sydney. Even market darling like CBA, the index’s highest-weighted stock, slipped after its full-year earnings earlier this month. — AFP
SYDNEY: Australia’s stock market keeps breaking record after record, but is proving ruthless towards any missteps.
A string of big names, from biotech giant CSL Ltd to building products maker James Hardie Industries Plc, chicken supplier Inghams Group Ltd and fast-food chain Guzman y Gomez Ltd, were hammered last week after missing earnings expectations.
In the same week, the S&P/ASX 200 Index notched yet another fresh high.
Now trading at about 20 times forward earnings, its richest multiple in four years, the benchmark has left firms under intense pressure this reporting season to deliver solid profits and convincing growth stories.
Those falling short are facing swift punishment.
CSL suffered its steepest-ever share price drop after revenue in a key division lagged estimates.
The next day, James Hardie endured its worst session in half a century after warning on weaker US housing demand.
Guzman y Gomez, barely a year after its much-hyped ASX debut, slid back to its initial public offering price last Friday after flagging slower sales.
On the same day, Inghams posted a record plunge after missing forecasts.
“The extent of the moves are really dramatic, and I think it’s a testament of a market that’s pricing in a lot of upside,” said Elfreda Jonker, client portfolio manager at Alphinity Investment Management.
“There really is no room for disappointment,” Jonker added.
Despite the bullish headlines, Australia’s stock rally masks rising investor impatience with underperformance.
This earnings season has exposed a widening gap between market optimism and corporate reality, raising questions about how long such elevated multiples can hold.
Australia’s market is now among the most expensive in the Asia-Pacific region, buoyed in part by its defensive appeal during bouts of volatility.
Its forward price-to-earnings ratio sits well above the five-year average, leaving valuations more stretched than any of its major regional peers.
Even market darling Commonwealth Bank of Australia (CBA), the index’s highest-weighted stock, slipped after its full-year earnings earlier this month.
While cash profit met expectations, analysts were left underwhelmed by its muted growth outlook in a falling interest rate environment.
While concerns about valuations persist, results so far have largely met expectations. Forward earnings forecasts have mostly held steady since the start of August, according to data compiled by Bloomberg.
That has been taken positively by markets on the whole, as seen by the benchmark’s fresh record.
Even so, doubts linger over whether earnings momentum is strong enough to support such lofty multiples.
The uncertainty increases pressure on conglomerate Wesfarmers Ltd, airline Qantas Airways Ltd and other companies scheduled to report this week.
“I don’t think that what we’ve learned so far in this earnings season is enough to justify these sorts of multiples of many businesses,” said Lochlan Halloway, equity market strategist at Morningstar Inc in Sydney. — Bloomberg
