The numbers that could reward the RBA's optimism

Upbeat company profit results, better readings from consumers and another record sharemarket high are backing the Reserve Bank's optimistic view on the economy in the face of the threat from coronavirus and bushfires.

Investors are feeling optimistic after the first big week of the interim profit season revealed some of the businesses most exposed to the domestic economy are performing better than expected. This comes on top of a recovery in consumer sentiment and resurgent property prices in the capital cities.

Breville and Kathmandu were rewarded with huge price gains, while results from JB Hi-Fi, furniture retailer Nick Scali and online homewares retailer Temple & Webster added to the upbeat tone. The S&P/ASX 200 closed at 7130 points on Friday and claimed an intraday all-time high during the session.

"While not universal across discretionary stocks, it’s fair to say that most of the results to date have been well received by the market," said Rob Pinnuck, portfolio manager at IFM Investors. "We had a tax return boost and a housing market pick-up post the election."

JB Hi-Fi chief executive Richard Murray told analysts that the housing market appears to be improving. "I agree conceptually," he replied when asked does the housing market feel better today than it did last year. There are "slight green shoots", he said.

Commonwealth Bank CEO Matt Comyn was optimistic about the prospects for the economy and expected the pace of the recovery to accelerate. Commonwealth Bank's 4.3 per cent fall in cash profit from continuing operations of $4.47 billion beat expectations of a more painful result.

"We think the combination of both the recovery and rebuild [following the summer's bushfires] and also some of the underlying strength in the Australian economy will start to come through in the back half," he said.

Commonwealth Bank shares closed at $90.99 on Friday, a level not reached since April 2015.

The consumer sector results to date should please the Reserve Bank. It has forecast consumption will gradually pick up following three interest rate cuts last year to a record low 0.75 per cent, along with tax cuts and an easing of mortgage borrowing restrictions.

Consumers have been reining in spending to pay off debt. "We expect that this adjustment will continue for a while yet but we also expect consumption growth to pick up gradually," governor Philip Lowe said in Canberra a week ago.

Dr Lowe's upbeat view on the economy is more optimistic than the majority of the country's market economists, many of whom are still expecting two interest rate cuts in 2020 as the central bank undershoots its inflation and unemployment targets.

"We continue to have a more downbeat view on Australia’s economic prospects for 2020 with growth expected to be around 2 per cent rather than the RBA’s expectation for an-around trend 2.75 per cent," said Westpac senior economist Matthew Hassan, describing the RBA as "surprisingly confident".

Consensus expectations for earnings growth "remain subdued" said Morgan Stanley's Australian equity strategist, Chris Nicol. Estimated financial year 2020 earnings per share growth is at 3.2 per cent, and rises to 4.9 per cent for 2021.

Coronavirus and bushfires are two risk factors looming over the economy, and the Reserve Bank has already shaved its growth forecasts for the fourth quarter of 2019 and the first quarter of 2020 to account for the bushfire emergency.

Rebound ahead

But, by sticking to its year-on-year growth forecasts for 2020 and 2021, the central bank is confident the economy will rebound later in the year. It declined to cut interest rates further at its first policy meeting of the year in February.

"We have an environment where rates have fallen dramatically and employment is still strong and stimulus is flowing through," said Hugh Dive, chief investment officer at Atlas Funds Management. "There's a bit more confidence in the economy."

Economic data and now company updates from those businesses exposed to domestic activity are adding support to the Reserve Bank's above-consensus view.

Westpac's latest consumer sentiment survey rose to 95.5 in February, from 93.4 in January, although it remains well below the long-run average of 101.4 points.

Retail sales data released this month showed sales volumes lifted 0.5 per cent in the December quarter on a seasonally adjusted basis, more than reversing a 0.1 per cent decline in the September quarter.

The rise was led by department store sales, up 2.1 per cent, with clothing, footwear and personal accessory retailing up 1.5 per cent, and household goods up 1.4 per cent, the Australian Bureau of Statistics numbers showed.

Employment also remains robust, with the unemployment rate falling to 5.1 per cent in December, for the second consecutive monthly positive reading.

Futures markets are still indicating that there will be at least one interest rate cut from the Reserve Bank this year, but the timing of a full rate cut has been pushed back to October.

Robust retailers

JB Hi-Fi reported a particularly robust set of figures. The consumer electronics giant revealed that total first-half sales climbed 3.9 per cent to $4 billion with comparable sales up 4.4 per cent as shoppers bought up phones, computers, TVs and accessories such as headphones.

Nick Scali reported a lower first-half profit but exceeded market expectations and attributed the better-than-expected result to stronger sales in the latter part of the six-month period.

Temple & Webster unveiled first-half revenue of $74.1 million, up 50 per cent on a year ago, and commented that the second half has started well. Year-on-year revenue growth exceeded 50 per cent to the end of January.

Discounting its new surf business which it purchased last year for $350 million, Kathmandu posted same-store sales growth of 1.5 per cent for the 26 weeks ended January 26.

Breville guided for an increase in full year earnings of at least 13 per cent this financial year after reporting a 14.1 per cent jump in first-half profit to $49.7 million.

Car parts retailer Bapcor was positive on the second half when it reported results. "Solid same-store sales continued in January," it said while underlining it expects record revenue, earnings and earnings per share growth in financial year 2020.

Carsales.com flagged solid revenue and adjusted net profit after tax growth in the 2020 financial year.

Choosy consumers

Still, consumers are choosy with their spending and management execution matters. "Positive re-rating reasons vary per stock and has been strongest amongst companies delivering growth," IFM's Mr Pinnuck said, giving Temple & Webster and Breville as examples.

Retailers have faced a number of specific challenges in the past few years, including a competitive threat from US online retail giant Amazon and shifting consumer spending patterns.

But the most recent crop of results show that "a number of companies appear to have navigated the ongoing shift to black Friday and promotional-based spending and coped well with the bushfire spending pullback," said Mr Pinnuck.

Atlas' Mr Dive said "what was really apparent in the JB Hi-Fi results is that they are combating Amazon successfully. They have have the benefit of seeing how offshore retailers have dealt with it."

The consumer staples companies are also proactively combating the offshore threat, he added. "Woolworths and Coles don't make money on home delivery but it makes it harder for Amazon."

The bushfires have led to some companies warning that their businesses would suffer in a torrid confession season which dominated January.

Beacon Lighting, Super Retail and Mosaic Brands (owner of Noni B) all warned that trading would be hurt by the summer's events. Several retail fashion chains fell into administration over the period including Jeanswest, Bardot and Colette by Colette Hayman.

Some of the market's giants have issued profit warnings, with vitamin maker Blackmores and wine producer Treasury Wine disappointing investors with downgrades in part linked to expected damage to their businesses from the rapidly-spreading coronavirus.

"These companies are more directly exposed to the front line of the virus situation," said ST Wong, chief investment officer at Prime Value Asset Management.

"Broadly I think that results [for the consumer-facing sectors] are coming in a bit better than expected," he said, adding "I'm not expecting major bad news".

Reporting season is not over yet. It will continue for another two weeks, with companies such as furniture giant Harvey Norman and online travel company Webjet yet to report. Wesfarmers, Coles and Qantas will post results in the week ahead.