While experts expected a muted profit reporting season given the low interest rate and, low-growth environment, many companies have surprised on the upside. According to John Meacock, Deloitte Australia’s chief strategy officer, the companies that have performed the best are those that have a clear picture of the future.
“It's certainly been an interesting reporting season. In every industry there has been some really strong performers and some not so strong companies,” he explains.
According to Meacock, in a market characterised by uncertainty and subdued confidence, businesses that have real clarity around their longer term direction, to help them guide decision-making today, are the ones that are setting themselves up for future success.
“These are the organisations that have done really well. What we are also seeing; however, is that given the increasing pressure on companies around their continuous disclosure obligations, some businesses haven't been able to manage profit expectations as well as they may have done in the past. So there have been ups and downs in the market as it has reacted when a business has reported a number that has been a surprise,” he says.
In terms of the effect of the low-growth, low-rate environment on listed Australian businesses, Meacock acknowledges this is producing challenging trading conditions. But he says there is still plenty of room for businesses to perform well if they have the right foundations in place.
“In any industry that's growing at, say, three per cent, you'll have some businesses growing at 15 per cent and others delivering a flat performance. But the environment is clearly not as easy as a high growth market, because everyone benefits in those circumstances,” says Meacock.
“Nevertheless the businesses that are really clear on their strategy and execution can still do well in low growth market. But they must have insight into where they're going and be conscious about the segments of their business that have potential. This will help ensure they are positioning the firm to achieve much higher growth compared to the industry average,” he adds.
In terms of the industry sectors that have done well, Meacock says businesses in the resources sector in particular are showing signs of recovery as the commodity price cycle bottoms out.
“It's an interesting time. The sector that has surprised everyone is resources. While it hasn't done all that well, our view is that many companies have reached the bottom of their cycle, and other businesses in this space have done better than expected,” he says.
In part, Meacock attributes the stronger-than-expected performance of the resources sector to short-term stimulus efforts by China, which has produced higher commodity prices than many may have been expected. “We’re expecting resources businesses to continue to improve from here,” he says.
Manufacturing is another sector that has produced better than anticipated results this reporting season.
“The performance of the manufacturing sector has been aided by the lower dollar, and there has been a substantial revival in this industry. The manufacturing index has expanded every month for the past 12 months, the best run in manufacturing seen in a decade,” enthuses Meacock.
The AIG Manufacturing Purchasing Manufacturer’s Index reached 56.4 in July, up from 51.8 in June. Any figure above 50 indicates activity improved compared to the prior month.
However, Meacock says the performance of firms in the retail sector has been mixed. “Many businesses have done very well even though it's been a low growth market. Some examples of businesses that have done well include; pizza delivery company, Domino's; and electronics retailer, JB Hi-Fi. The businesses that have harnessed the potential in the market have done well,” he says.
As for the remainder of the year, Meacock says the main challenge is confidence. The NAB Business Confidence Index fell from 5 in June, to 4 in July. The average figure is 5.73.
“There are concerns about growth, the US election, China and potential further reductions to the interest rate in Australia. Clearly, if we had a very strong economy, interest rates would not be dropping,” he says.
Meacock acknowledges for many firms, strong growth will be difficult to achieve against this backdrop, and those that have a well-articulated strategy will put themselves in the best possible position.
“A really good organisation must have real clarity about its longer term positioning, a six-year-plus view. It also needs a six month view to achieve that agility in the short-term. This is what organisations need in a low-growth market, especially in the face of uncertainty,” he says.
As for the impact of the recent cut to the cash rate, he says the Reserve Bank of Australia was expecting this to dampen the value of the dollar, which should help exporters over time. Additionally, he anticipates businesses will remain focused on disruption and transformation in the short term.
“Company performance will be driven over the next 12 to 24 months by clarity around the business model, given what's happening in technology and changes in the economy. Businesses that are not looking at how they evolve their business model risk underperformance,” says Meacock.
- Resources sector businesses produce a better than expected performance.
- Results from companies in the manufacturing sector are consistently improving.
- Mixed results from the retail sector.