We take a second to assess the major themes, big winners and inevitable losers as the Australian market limps towards the end of reporting season. With roughly 80% of reporting season complete in both small and large cap companies, results and guidance have come in on the disappointing side of expectations. A recent UBS report suggested 35% of large caps have experienced a consensus earnings downgrade of 3% or more while only 10% have seen an upgrade of 3% or greater. This disappointing local result contrasts with a supportive global back drop as the US, Europe and Japan return to growth.

Of the companies to report so far, the average consensus downgrade to FY18 earnings has been -1.7% (Bloomberg). Surprisingly, the weaker results are a far cry from the recent NAB Business survey which continue to suggest buoyant conditions. Noteworthy downgrades have come from Bluescope Steel, Challenger, Crown Resorts Limited and market favourite Domino’s Pizza. While the biggest positive surprises have been from Bendigo & Adelaide Bank, CIMIC Group, Flight Centre and Fortescue Metals Group.

We have pulled together some prevalent themes from reporting season below.

Resources finally have a heartbeat and have been the standout of reporting season

After years of benign conditions, Chinese demand for Australian commodities has officially returned and iron ore prices appear to be stabilising.

The LME Metals Index has recorded its seventh consecutive weekly increase, the longest rally since a nine-week run in 2006! With massive economies of scale and deep cost cutting, Australian miners are highly leveraged to this increase in demand.

With cost cutting exhausted, management teams are focusing on capital investment

Following years of aggressive cost-cutting to achieve earnings growth, we are seeing early signs of an investment backlog hitting the market.

Telstra was the highest profile example, with the group announcing a large cut to dividend guidance as it allows for further investment into the core (mostly mobile).

Chinese consumer demand for luxury brands on the rise

Chinese consumer demand for high quality Australian and New Zealand produce has seen Treasury Wines and A2 Milk continue to outperform the market. A key challenge for both companies is their ability to satisfy the significant customer demand for brands like Penfolds, Rawson’s Retreat (for Treasury Wines) and A2 Platinum infant formula (for A2 Milk).

Housing still strong…. for now

Results so far suggest the domestic economy is still in a relatively benign state. That said, we have seen no movement of bank sector bad debts. Housing remains resilient as per Stockland and Mirvac Group results.

Australian Financial Group, the country’s largest residential property broker, even recorded a strong start to the year in key East Coast states of VIC and NSW.

Premium rated stocks on average have disappointed

Stalwart growth companies such as Domino’s Pizza, REA Group, CSL, Seek, James Hardie and Resmed have all disappointed either operationally or with weaker outlook statements. Many of these offshore growth companies have been dragged lower by a higher AUD exchange rate.

Small Industrials reporting season tracker

The chart below illustrates more earnings per share (EPS) downgrades than upgrades in a broadly underwhelming reporting season.

Source: Bloomberg, JP Morgan estimates