Some sectors remain overvalued in the current market environment.
With earnings season imminent, investors and markets are keeping a close eye on specific sectors and stocks to determine exactly what impact inflation, rising interest rates and macroeconomic pressures have had on business and sector performances over the first half of FY23. Given share prices are forward looking and are yet to factor in the stubbornly high inflation both at home and overseas, investors are likely to be harsh critics this reporting season as some sectors remain overvalued in the current market environment.
Investors are holding their breath for the release of the big bank results, with expectations that provisions for doubtful debts will increase amid reports that more than 1 in 5 Aussie home loans will switch from fixed to variable by the end of 2023.
With China’s reopening driving demand outlook for commodities, especially oil, iron ore and lithium, investors have been very responsive to quarterly trading updates already released prior to reporting season even kicking off. Markets will undoubtedly be eagerly awaiting the half and full year results released over the next few weeks in this sector.
Mineral Resources is one such miner that announced delays to its production expansion of lithium at its Mt Marion operations which caused a 2% sell-off in one session late in January.
The global energy crisis is also fuelling record quarterly results for the miners with big expectations for first half results to follow suit. Woodside Energy Group reported record quarterly production for the December quarter of 51.6 million barrels of oil equivalent, up 0.7% from the prior quarter, for record full-year production of 157.7 million barrels of oil equivalent. The company also contributed 29.4 petajoules to the east coast Australian gas market in the quarter amid the ongoing global energy crisis. As Russia’s war with Ukraine continues, we may see investors continue buying into the 2022 darling energy sector this reporting season amid continued inflated energy markets for oil and gas providers.
The Aussie spot price of gold remained strong in 2022, despite the USD spot price of the precious commodity weakening. This strength of gold in AUD provides a strong outlook for Aussie gold miners in 2023 as the USD weakens and sustains the increased price of gold. Investors remained wary of the gold miners in 2022 through broad market volatility and weakness in the sector on global markets, so we may see investors pivot to buying into the discounted share prices this earnings season on the back of the strong gold price outlook, especially after hitting a 9-month high of US$1,934.82 late in January. Bell Potter has a buy rating on Regis Resources with an increased price target of $2.68 with the company boasting a good foundation for a strong second half of FY23.
The beaten down, post-pandemic technology sector is proving to be an area of opportunity in the new year, with a few opportunities in the eye of the investor. Since January 1, the info tech sector has risen 3.56%, beginning to recover from a decline of 16% over the last year. Investors are still wary of diving into high growth outlook companies though, in favour of investing in companies that have recently turned cash flow positive or are proving to be on-track to profitability. Buy now, pay later company Sezzle is a prime example having rocketed 51% since January 1 after turning a profit for the month of November following heavy cost-cutting measures in 2022 including halving the staff headcount.
Retail stocks have proven to be out-of-favour with investors in recent months as the outlook for consumer spend on discretionary goods is declining with every interest rate hike. Despite the recent shift in consumer shopping to value brands over fashion items for clothing retail, even companies like Best & Less are being sold off as sales and profit are beginning to slide. The retail sector may find itself in a similar position to the tech sector was in 2022 in this high inflation, high interest rate environment, as investors and consumers alike shift spending patterns to staple items over luxury products.
This reporting season, consensus is that investors will be expecting companies to provide:
- Growth outlook for the year ahead amid harsh cost-cutting measures across many sectors in 2022
- Profitability outlook for tech companies
- Growth in production for the big miners especially during this global energy crisis
- Insight into inventory levels held by retail companies
- Product/service price increases to match interest rate pressures
Grady Wulff is a Market Analyst at Bell Direct
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