The Australian equity market reacted positively to the February reporting season, providing a relief rally after beating the market’s pessimistic expectations. But while results were not as weak as feared, it has generally been a tough environment for earnings, with more company downgrades than upgrades. In absolute terms, earnings expectations for FY19 have been tracking lower and overall market earnings are now expected to grow at around 4% in FY19, down from 7% in FY18.

Positive results for the Resources sector

Results from the Resources sector were the highlight, with earnings expected to grow by 13% in FY19, driven by ongoing strength in commodity prices and the strong balance sheets in the sector. The short-term outlook remains positive for the sector if spot prices remain around current levels, which could lead to material earnings upgrades for the likes of BHP and RIO over the next 12 months. This is in contrast to the Industrials and Financials sectors where earnings growth expectations remain in a downtrend, which is expected to continue through FY20.

Companies are still paying dividends

We saw a number of companies (including BHP, RIO, WES, WOW, FMG, CTX and MFG) lifting their dividend payout ratios and announcing special dividends or share buyback plans. This was driven in part by management looking to return excess capital and franking credits to shareholders ahead of potential policy changes following this year’s federal election.

Looking ahead at 2019

The ongoing slowdown in the housing market, policy uncertainty ahead of the federal election, and the outcome of the US-China trade negotiations remain the key headwinds for equity markets over 2019. These factors are increasingly reflected in outlook commentaries across our investment universe. In Lonsec’s view, the recent contraction in the growth rate of corporate profits will need to be reversed to justify current valuation levels, particularly given the momentum of the market rally to date during this calendar year.

How has earnings season affected Lonsec’s portfolios?

Looking specifically at the impact to our portfolios, the stocks in the Lonsec SMA—Core portfolio had a relatively strong reporting period in February, with CSL, CPU, WPL, QUB and REA delivering strong double-digit earnings growth. Meanwhile CBA, RHC, COL, and CGF reported broadly flat or negative earnings growth over the half. Looking ahead, earnings across the portfolio are expected to grow by around 5% over FY19, driven by the overweight position in Healthcare and underweight exposures to Financials and Materials.

This document has been prepared by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 Australian Financial Services Licence (AFSL 421 445) (Lonsec Research). LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN: 151 235 406. We can be contacted on 1300 826 395, by email to, or by writing to L7, 90 Collins Street, Melbourne, Victoria, 3000. You can also visit our website at

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