Our market is on track to notch up its fifth consecutive trading day of gains and this month’s reporting season gives me reason to believe that the good times can keep rolling on for a little while yet!
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 0.3% in late afternoon trade and is sitting on around a 4% gain over the past two weeks as the short but sharp market meltdown at the start of the month becomes a vague memory.
I’ve been using any weakness as a buying opportunity and I am now close to being fully invested in the market again after sitting on 25% cash as this reporting season has convinced me that our market can rally further from here.
There are a few reasons for my bullish take. The first is the fact that the outlook for sectors that the market was bullish on has not changed. This includes mining and oil and gas.
While there were some notable stocks that didn’t live up to reporting season expectations, such as South32 Ltd (ASX: S32) and BHP Billion Limited (ASX: BHP), analysts are still bullish on mining for 2018.
Also, earnings upgrades during the reporting season were concentrated in the oil and gas space and even fuel retailer Caltex Australia Limited (ASX: CTX) pumped out a better-than-expected profit result today.
The second reason, and perhaps more important factor, is that the outlook for many of the weaker sectors has improved coming out of the reporting season.
The obvious ugly duckling here is retail but a number of strong results from the likes of Webjet Limited (ASX: WEB), ARB Corporation Limited (ASX: ARB) and Breville Group Ltd (ASX: BRG) shows there is still plenty of life in the sector.
While the outlook for telecommunications stocks such as Telstra Corporation Ltd (ASX: TLS) still looks sombre, at least their operating conditions have not deteriorated.
Another big reason to feel bullish is capital returns and dividends! Companies are generally flush with cash and balance sheets are in good health thanks to companies taking a conservative approach to spending to brace for a downturn that either didn’t eventuate or was not as severe as initially feared.
This is probably why we are seeing more companies increasing their dividends than cutting them, and that is a bullish sign as company boards only increase their payouts to shareholders when they are feeling bullish about the future!
What’s more, a host of companies have committed to buying back their shares. These include dairy products company A2 Milk Company Ltd (ASX: A2M), rubber products maker Ansell Limited (ASX: ANN) and steel maker BlueScope Steel Limited (ASX: BSL).
There’s around $6 billion in buybacks to be done over the next 12 months, according to data from Bell Potter and this amount does not include expected increases in buybacks from the likes of BHP and Qantas Airways Limited (ASX: QAN)!
A fourth factor to be upbeat about equities is that the results have largely supported economists’ expectations for an acceleration in economic growth in Australia and around the world in 2018.
There are very real risks to our economy like the record household debt and weak wages growth, but the good news is outweighing the bad at the moment.
Lastly, I am expecting a pick-up in mergers and acquisitions. We are already starting to see some large deals come through the pipeline, like the takeover bid for Westfield Corp Ltd (ASX: WFD), and I think this is only the tip of the iceberg.
It’s hard to feel too pessimistic about risk assets when there are large eager bidders waiting in the background.
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