In the wake of COVID-19, it’s almost a guarantee FY20 reporting season on the ASX will throw up some surprises this August.

Speaking on a media conference call yesterday, UBS equity strategist Pieter Stoltz said future earnings expectations would be just as important — if not more so — than FY20 results.

“This one is very unique because of the pandemic and the resulting economic shock,” Stoltz said.

“Right now a lot of market participants are looking through this reporting season — and indeed the next 12 month of earnings — to FY22 and FY23. So it will be interesting to see if that is the case on results day,” Stoltz said.

He added that investor radars would be more finely tuned to the type of forward guidance companies could provide, given such a tumultuous six months to the end of June.

And that’s important because right now, “even if they miss on FY20 the market’s pricing that they’ll do just fine. But we’ll see if that’s the reality come August”, Stoltz said.


Keep calm and stay long

Also speaking on the call was Richard Sleijpen, UBS’ local head of equity capital markets, who discussed a number of trends the bank was seeing among both investors and capital markets activity.

Broadly speaking, Sleijpen said equity markets remained well supported, although he noted the ASX had largely tracked sideways since early June following a barnstorming two-month rally. But for now, investors are holding on for the ride.

“What we’ve seen from an investor perspective is a desire to remain fully invested,” Sleijpen said.

“That’s due in part to the pain many investors felt having sold down and gone to cash in March, only to be poorly positioned when markets rallied in April.”

“So most investors have formed a view they should stay fully invested, notwithstanding the overall sense that valuations are looking stretched at the current point in terms of earnings, and from an economics perspective.”


Retail activity ‘quite unusual’

Across developed markets such as the US and Australia, a surge in participation among retail investors has been a feature of the post-COVID rally.

And from Sleijpen’s perspective it’s had a material effect on some sectors, particularly the red-hot BNPL sector and some travel stocks.

“Retail investors as we all know have also been a very big contributor to volumes,” Sleijpen said.

“Some of the share price increases over the last few months … including BNPL stocks such as Zip Co (ASX:Z1P) and Sezzle (ASX:SZL), we’ve seen retail brokers like Commsec have considerable market share — and over some time periods being the number one broker in those stocks, which is quite unusual,” he said.

“And that’s a reflection of the money that’s coming back into the market, both in Australia and the US, from the retail investor.”

Sleijpen also said the relative lack of volatility in June and July had also been a support mechanism, “in so much as lower volatility means investors with leverage strategies can add more gearing, and that’s been a very significant aspect of support over last two months.”

Lastly, Sleijpen said one interesting fallout from the pandemic was that Australian stocks had come back onto the radar of global investors, where pre-pandemic they were viewed as on the expensive side.

“What’s interesting from a global perspective is that many fund managers had been withdrawing funds from Australia because valuations had typically been higher compared to offshore markets,” he said.

“But we’ve seen that trend reverse, with large global funds coming back into capital raisings or the buying of listed equities.”

However, Sleijpen said the recent outperformance of the Aussie dollar — which has climbed back above US70c — could see that slow in the months ahead.