CFS Market Insights: September 2023

Welcome to CFS Market Insights. This month we'll be looking at the Australian reporting season, highlighting the performance of Qantas and Woolworths. We'll also cover the latest in China and what it means for our portfolios. And finally, we'll look at what's happening in the global energy landscape. So we'll kick off with the Australian reporting season. Results were pretty much in line with expectations and demonstrated resilience, which is important given the current economic headwinds.

The country's national airline reported a profit of $2.5 billion dollars, a very strong turnaround from its $1.3 billion loss in the previous financial year. The 118% increase in revenue and only a 60% increase in costs demonstrates the carrier's margin expansion. And that was through a combination of price rises but also cost cutting. 

Another really strong performer was the Woolworths Group, which reported a profit of $1.6 billion, up 14%. Importantly, its EBIT margins of 6% will actually sort of see a little bit of drum beating on price gouging. So we're likely to see spring discounts in order to see more pricing balance restored.

So what did this reporting season reveal when it comes to Australian corporate profitability? Typically, companies use every lever to retain or grow their margin apart from price increases. Now we're seeing that more companies have pricing power and will therefore use that lever when necessary and pass on higher costs to consumers. 

This very much feeds into the narrative that we've talked about before - that you'll continue to see volatility in inflation data, that is, an environment where inflation will move up and down. 

So the positive news out of this Australian earnings season is that certain companies are making a lot of money and that's very good news for dividends and good for shareholders. 

News out of China has been consistent with what we've shared with you before. It's very much a drip-feed response with targeted measures continuing, most recently about reducing payments for borrowers and lowering rates on existing mortgages.

China obviously remains a very important economy for Australia, and in terms of what its evolving dynamics mean for our portfolios, our investment team is spending a lot of time looking at this important market. Valuations look compelling and are discounting a lot of bad news. So we're looking at whether we can add exposure to onshore Chinese companies to our portfolios.

When it comes to global energy, we've seen a material rise in both oil and natural gas prices over the last six to seven weeks, with price rises ranging from 15 to 20 per cent. The driver to this has been industrial action in Australia's largest gas project, the North West Shelf in Western Australia. 

The news of worker strikes, and therefore disruption to gas exports, has triggered a price surge in European gas prices.

Normally a strike in Australia wouldn't impact things in Europe, but following Russia's invasion of Ukraine, the dynamics in energy markets are more unusual and what we've seen in Australia is now having a domino impact in Europe. 

This is a really good example of how energy prices are having more of an impact outside of Asia than we've historically seen and another example of where inflation volatility is playing out, and having a much greater impact on a wider range of markets. 

Thanks very much for watching CFS Market Insights, I look forward to seeing you next month.