Reporting season wrap up: Storytelling over substance

Investors looking long term

This year's reporting season has revealed a fascinating divergence between companies with strong short-term results and those attracting investor interest due to underlying price trajectory, growth projections, durability and thematics. Strong financial performance by big mining companies, courtesy of iron ore and steel prices, was not reflected in stock movements. However, the tech sector was a standout as investors look to companies that can tell an optimistic story about the future. The COVID pandemic has created beneficiaries such as online supermarket retailers, as well as companies making large losses. Again, however, investors are distinguishing between the immediate effects of lockdowns and medium to long-term profitability.

This season's winners and losers

Tech generally performed well and can be put in the winner's column, reflecting the growth of major US players like Amazon and Google. The tone of reporting season was set by payments fintech Square's US$29 billion acquisition of Afterpay. WiseTech Global achieved approximately a 50% share price increase in August, based on solid but unspectacular results. Outside of the technology sector, Domino's Pizza was a winner, with investors embracing its plan for a longer-term store rollout.

Some companies like BHP, Fortescue Metals Group, Rio Tinto and BlueScope had good company performance; however, a dip in spot prices (as opposed to future prices) for iron ore and steel subdued stock gains. Property giants like Lendlease are facing challenging times and haven't been able to deliver the value that shareholders expect.

The outlook post-COVID

Despite how good things seemed a few months ago, the current Delta outbreak in Sydney and Melbourne means Australia isn't yet entering an economic recovery. Online retail and supermarkets are understandably doing well in a lockdown environment. Amidst ongoing uncertainty, people remain hopeful about the prospects of travel stocks like Qantas and Flight Centre. Their share prices are holding up despite the companies posting large losses, as investors await the return of Australians' massive propensity to travel once borders reopen.

Other companies are doing it tougher than normal. One example is Ramsay Health Care, which has faced challenges due to postponed hospital elective surgery. In general, though, investors are able to see through short-term challenges in favour of long-term value.

Without a crystal ball to say when lockdowns will end, it's unclear which companies and industries will come out strong. Tourism and hospitality remain incredibly challenged by lockdowns, as do sectors such as property and commercial office space. And will the transition to online retail survive, or will we revert to more normal ways of shopping post-COVID? Only time will tell.

A new approach to sustainability

The strong actions of some of Australia's largest companies in support of ESG (Environmental, Social and Governance) has become a major trend. In this respect, BHP probably provided the highlight of reporting season. Not even the most optimistic observer would have expected it to divest its petroleum business by merging with Woodside: one of the biggest deals of recent times and an amazingly well-kept secret.

The important point for investors is that the ESG debate needs to transition away from a portfolio emissions approach. Simply moving investments to companies with lower emissions is not going to be enough. We're at the juncture where high-emitting companies that invest aggressively to clean up their energy consumption can make the biggest difference to Australia's carbon footprint.

Positioning our equities portfolio

There are some great opportunities in the market; however, we are not looking for 'momentum darlings' but businesses with a reasonable price trajectory, valuations and underlying performance. At the moment, that includes telcos, aluminium, and insurance; in other words, sensibly priced stocks with underlying assets that are headed in the right direction.

Broadly speaking, industries like insurance - including QBE - and even some businesses affected by lockdown, such as Vicinity Centres, did reasonably well for us during the month. Because we don't have massive portfolio positions in companies that have been impacted by iron ore and steel price fluctuations, we didn't fare too badly.

Extreme bull market conditions have meant that speculative stocks have done especially well. However, this is 'no time for heroes' when investment managers should be super aggressive in portfolio positioning. Instead, we are looking to sustainable businesses across a broad range of sectors - in commodities, materials, financials, insurers and supermarkets. These offer the prospect of durability without being subject to too many external factors.