Why the market remains weak despite strong first half earnings
Last week, I mentioned how first half earnings of listed companies were surprisingly better than expected. Out of all the companies that we cover, close to 50 percent outperformed our expectations, with the weighted average growth in profits reaching 28.8 percent. Although companies experienced higher costs due to rising inflation, this was largely offset by the significant improvement in sales resulting from the reopening of the economy, price increases, scale benefits brought about by higher sales and cost cutting initiatives implemented the last two years.
Restaurants, retailers, hotels and mall operators benefited the most from the reopening of the economy, with higher foot traffic pushing up sales by high double-digit levels.
Banks were also major beneficiaries of the loosening of restrictions as they enjoyed stronger demand for loans, higher net interest margins, and less need to set aside provisions given the improving outlook for asset quality.
However, not all is perfect, which is the reason why the mood in the stock market remains cautious.
While consumer companies, banks and property companies focused on hotels and malls performed well during the first half of the year, there were others that did not.
For example, cement companies suffered from weaker demand and significantly higher costs. As a result, all cement companies delivered weaker profits during the first half.
Telcos’ broadband business, which grew rapidly during the pandemic, is now showing signs of a slowdown. During the second quarter, the pace of subscriber additions decelerated for the third quarter in a row. This could indicate that the market for fixed monthly broadband subscriptions is already maturing. To address the potential slowdown, Converge and Globe plan to launch pre-paid fiber broadband services to expand the market for fiber broadband.
Although consumer companies experienced strong first half earnings results, some companies could suffer from weaker earnings in the second half of the year as they bought raw materials when commodity prices were still elevated. The peso is also much weaker today than during the first half of this year, and pushing up the cost of imported raw materials.
Although property companies are enjoying a recovery in their hotel and mall leasing businesses, demand for their residential projects is not as strong, with some companies registering weaker take up sales and higher levels of cancellations. To address this problem, property developers are relaxing payment terms to boost take up sales. However, this would delay revenue bookings. Rising interest rates should also hurt demand going forward.
Although demand for loans were very strong during the first half, it could weaken in the second half because of higher interest rates, and this could pull down the growth of banks’ full year profits.
There are many issues hampering the earnings growth outlook of listed companies. Coupled with uncertainty on when inflation will go down and when the US Fed will stop raising interest rates, it will be difficult for the stock market to enter a bull market in the short term. However, this doesn’t change my view that now is a good time to accumulate stocks. This is because the negatives are priced. Once everything is perfect, prices will be much higher than where they are right now, and I am optimistic that we will eventually overcome these challenges.
