5 themes to watch out for on the ASX this reporting season

August is fast approaching and with it comes the reveal of many long-awaited year-end earnings reports. It's our first chance to see how some of our favourite ASX constituents truly performed during what proved to be an extremely eventful six months. This includes how their corporate earnings stack up compared to previous years, and most importantly, what management teams believe investors can expect from companies in the future. 

In preparation, Morgan Stanley analysts Chris Nichol, Chris Read, Antony Conte, and Paul Basha have produced a list of the top five themes to watch out for this reporting season. They expect these themes will be key indicators of both investor sentiment and risk appetite going forward, spanning from inflation to spending trends.

1. Consumers cling to their cash

Morgan Stanley believes that retail sector valuations appear reasonable in comparison to historical prices, but have missed on top-line growth. Meanwhile, EPS consensus estimates have continued creeping upwards since February. With reporting season approaching, and Morgan Stanley expecting the economy’s momentum to weaken, there is increased risk in the sector, it said. 

Further factors to look out for are changes in consumer spending as rates increase, price-setting power, and sustainable “cost in” assumptions for areas like wages.

Consumer spending intentions have decreased rapidly...

... While the tougher outlook is yet to reset sales and earnings estimates

2. Cheap debt not so cheap anymore

As you are well aware, interest rates have been sliding lower for the last decade, leading many companies to grow accustomed to extremely cheap debt. However, since the RBA began tightening its policy, the 90-day bill rate has grown to greater than 2%. And now, Morgan Stanley believes companies could come under pressure. 

“This could surprise bottom-up assumptions that could still be well anchored until told otherwise," it said. 

Short-term funding costs have risen sharply - and Morgan Stanley expects them to continue to rise:

3. Storm clouds gather as banks face serious headwinds

Morgan Stanley’s bank analysts expect that a “quick and aggressive” tightening cycle will benefit the net interest margins (NIM) of the banks. But rising rates will also simultaneously weaken the housing and mortgage markets, as well as tilt the scales in the wrong direction towards, you guessed it, a recession. 

Early evidence of NIM expansion should be reflected this reporting season, Morgan Stanley said, and the degree to which this manifests in some recovery for bank share prices will be indicative of how the market views the impacts and risks of the ongoing tightening cycle.

“Our portfolio underweight for the sector is predicated on a view that weaker housing and mortgage markets and higher probabilities of recession will lead what is a small prize of some near-term margin relief to be clouded over by growth risks," it said. 

Consensus still tilts towards overweights for the major banks except for CBA:

Retail has traded over AU$1bn in CBA alone in June:

4. The Aussie dollar takes a dive (and could continue falling)

Companies with global earnings represent almost 30% of the ASX 200 by market cap. Morgan Stanley analysts believe that many of these companies are well positioned to take advantage of the benefits that a lower AUD brings, arguing the weakening of the currency will provide some benefit to earnings in the second half of FY22. 

It also revealed it expected further weakening of the currency in the short term. And with the AUD already less than 70c, this may potentially shift models that currently use a 75c assumption.

Morgan Stanley believes that as RBA hiking is priced in, any easing of this would place downwards pressure on AUD:

5. The seemingly never-ending story of inflation

A lot has changed since February's earnings season, Morgan Stanley said. Remember when inflation was "transitory"? Well, not so much anymore. 

"Supply chains were clunky and costly but expected to ease," Morgan Stanley said. 

"Financial conditions were easy, and the tightening cycle was expected to be measured in pace and size. Pricing power was on show, and consumers were in a reopening mood."

Clearly much has changed in only a short amount of time, and Morgan Stanley believes these changes must be addressed before the market hits its trough.

Inflation expectations maintain an upwards trajectory:

What to expect this reporting season on Livewire

The all-important August earnings season is fast approaching and Livewire - as your trusted guide to investing - will be producing some cracking content to help get you through it. 

This includes: 

• An exclusive interview with FN Arena's Rudi Filapek-Vandyck for his outlook on earnings season.
• Daily stock coverage (with commentary from some of the best fund managers in Australia, including whether they would buy, hold or sell a stock off the back of its report). 
• Two exclusive interviews with Market Matters' James Gerrish - one of which you can check out here already - with Gerrish's three sectors (and 6 stocks) to watch ahead of reporting season. 
• Bell Potter's earnings season calendar. 
• FN Arena's weekly reporting season monitor. 

Plus, we will also be shooting three special Buy Hold Sell episodes at the end of the month, hosted by Matthew Kidman for a look at the stocks that smashed expectations (and those that didn't). 

And because Buy Hold Sell is for the Livewire audience, and the Livewire audience alone, we'd love to know what questions you would like Matthew to ask our guests. For example, is there a burning question that you feel fund managers have forgotten? Is there a company that had an awesome result (or not so awesome) that you want to be covered? 

If you have any questions for Matthew and the Buy Hold Sell team, please send them through to: ally@livewiremarkets.com 

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