We all know that every year the reporting season is a key period for company announcements, but don’t underestimate your trading and investment opportunities that might come up during the period BEFORE reporting season — otherwise known as ‘confession season’.
In Australia, companies present their profit results during the key reporting period from August to September. For companies whose financial year ends on 30 June, this is obviously an important period. But it’s also important for companies whose financial year ends in line with the calendar year because they will report their half year results.
Confession season happens during the months between May and June before all those profit results are released. It’s the time where companies come out to adjust the markets and analysts expectations around profit. This is where companies that think that they are going to miss forecasts come out and ’confess’ their wrongdoings.
Here are the main things to be careful of this confession and earnings season:
The Australian dollar is the highest it has been in 30 years. In 2011 so far, the Aussie dollar has risen 7.5% against the US dollar.
What does that mean for companies? A high currency is great news for importers and bad news for exporters.
For exporters, Australian goods start to look expensive to the rest of the world. Companies that make most of their money overseas are impacted negatively as well. That's because when they bring their profits back into Australian dollars, the company loses on the currency exchange.
On the other hand, for importers a rise in currency can be good news because they can obtain goods for a cheaper price. Cheaper prices lead to price deflation, which is just a fancy name to say that prices fall. When prices fall, it’s good news for retailers because they can source goods for a cheaper price from overseas. But it’s a double-edge sword. Why? Because when prices are cheaper, importers have to sell more goods to maintain their previous profit amounts.
Companies likely to be impacted negatively by a high Aussie dollar include:
Oil, copper and gold prices are up around 30% in the past year. In fact not only have hard commodity prices been rising but soft commodity prices have been rising too. That means for most companies the cost of the raw materials that go into production have been rising.
One of the areas hit hardest has been the industrial sector. For example, fuel costs represent around 30% of operating expenses for airlines. Combine that with a drop in the demand for travel due to disasters in Japan, New Zealand and Australia in the past year, and it leads to a difficult environment for transport stocks.
Companies impacted by higher input costs:
This is the old adage that investors should sell their stocks in May and buy back after Halloween (October). There are many theories on why this may be beneficial, such as the fall-off in trading demand in the northern hemisphere when the summer season hits. But is there any truth in it for the Australian market?
After crunching the numbers from 1993 when the ASX 200 benchmark was introduced, it looks like there is no basis for this old adage.
During the last 18 years, only seven of those years would have seen you better off if you were not invested in the sharemarket between May to October. Those years where adopting the ‘Halloween Strategy' would have been beneficial for you were 1994, 1998, 1999, 2001, 2002, 2008 and 2010.
It looks like this adage works in falling markets but not in rising markets. So in a negative performance year, you would be better off having your money in cash.
All up there seems to be significant headwinds for the Australian sharemarket. The two things that I would be watching closely is:
Both of these are related as they have been fuelled by the weaker US dollar.
Happy trading!
Julia Lee Equities Analyst Bell Direct
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