ASX Makes Weekly Gain of 1.3pc – Earnings to Watch Next Week

Summary

• Earning season reports and commodity prices helped Australian indices to post a weekly gain. A further conviction is stemming as China is gaining momentum, giving positive signals to investors.
• Australian mainstream indices continue to remain well-below pre-COVID highs. But gold and iron ore miners are being increasingly favoured by market participants as demand and prices for both the commodities are on the rise.
• Next week, a number of large Australian businesses are set to report earnings, including Commonwealth Bank, AMP Limited, Transurban Group, Magellan Financial Group, and Breville Group.

Equities ended the week on a positive note, with benchmark index S&P/ASX 200 registering a weekly gain of 1.3% on 7 August 2020, led by higher commodity prices and results released by several companies. Gold prices made a new high in a low interest-rate world, pushing gold miners higher on the table.

Iron ore, gold as well as crude oil prices were higher during the week, driving investor confidence in companies associated with these commodities. Earnings report from companies also gave investors better clarity.

Gold prices are marching higher and breaching records, backed by growing uncertainty, lower risk-free rates and increasing inflation expectations. In light of this environment, ASX gold stocks are also on the run.

Governments across the world are issuing sovereign debt to fund the policy measures as revenue sources may not fulfil the ambitions that have been embarked at the backdrop of this pandemic.

China has been able to contain the virus, and economic activity in the country is rising, which means more demand for Australian goods as well, given the strong trade between the two countries. Although relationship with China has turned sour, it remains clear that both countries should have a mutually accepted trade partnership.

Chinese Government has also unveiled its stimulus plans, which have added to the demand for iron ore. They are also seeking to diversify the imports of iron ore, and the relationship with Brazil is growing warmer at the backdrop of tensions with Australia.

Australian equities have not reached far

Mainstream indices in Australia are still down by a notable margin compared to pre-crisis levels. It also indicates the dominance of cyclical sectors like financials and resources in the indices. Investors are eagerly waiting for the results of large banks that would provide further clarity into the largely followed Australian banking space.

Lockdowns in Victoria have now pushed the recovery further ahead in the timeline, but the initial Government initiatives like JobKeeper will continue at similar scale until September, post which JobKeeper would entail some changes.

JobKeeper has allowed businesses to save on operating expenses, which are crucial for companies to manage profitability, especially at times of distress. Fiscal response by the Australian Government has evaded a larger demand collapse.

Early super withdrawal by the Australian workforce has given demand support to the economy, and loan deferrals by the banking industry have also provided households with headroom in incomes after dislocations in employment.

Unemployment is now expected to remain at elevated levels over the next few years, largely dependent on the economic recovery in the country. The rising infections in Victoria have taken a toll on the economic recovery as well as unemployment.

Earnings season is well underway

Streets are loving the spectacular demand in homewares, furniture, stay-at-home goods, and online retail. Full-year results from Nick Scali Limited (ASX:NCK) have cemented the belief of better-than-expected outcome from homeware and furniture retailers.

Nick Scali posted a decent result despite the pandemic and has seen the momentum in demand continuing in this financial year. Online sales drove the growth in sales while JobKeeper payments were also received by the company.

The company delivered a flat profit of $42.1 million after excluding the impact of AASB16. Sales revenue for the year was $262.5 million compared to $268 million in the previous year. NCK estimated that sales loss as a result of store closures were ~$9-11 million.

In FY20, the company delivered total dividends of 47.5 cents after declaring a fully franked final dividend of 22.5 cents per share to the shareholders of records on 6 October 2020, payable on 27 October 2020.

It was also understood that initial order of the company for this financial year is significantly higher than the previous year. Nick Scali expects to deliver at least 50-60% profit growth in the first half of FY21 compared to the same period last year.

Insurance Australia Group Limited (ASX:IAG) also released full-year results. Its profit fell approximately 60% over the previous year, after Australia tumbled with natural disasters during the year. The company had earlier flagged that dividend pay-out ratio has been achieved with the payment of interim dividend.

FY20 reported margin of 10.1% was well outside of IAG’s guidance of 12.5-14.5% largely due to higher natural peril claims, increase in reserves, credit spread impacts, and professional risk and worker compensation. IAG noted that COVID-19 has accelerated the adoption of digital channels by customers, and it is assessing opportunities in the space.

Next week, a number of companies are set to report earnings, including Commonwealth Bank of Australia (ASX:CBA), Challenger Limited (ASX:CGF), Shopping Centres Australia (ASX:SCP), Magellan Financial Group Limited (ASX:MFG), Breville Group Limited (ASX:BRG), AMP Limited (ASX:AMP), and Transurban Group (ASX:TCL).

(All currencies in AUD unless or otherwise stated)