There could be much ado about the upcoming February reporting season.

The profit results announced by the companies are retrospective, says Morningstar head of equities Peter Warnes, and are therefore reflective of previous market cycles.

But with the full effect of higher interest rates still flowing through to households and businesses, company outlook statements will be key.

The calm before the storm

It’s a salient view he shared recently on a client webinar. Warnes expects a relatively solid reporting season. He also believes dividends “should be ok” for the period just ended.

But what he is worried about is what is going to happen following the reporting season. The impact of the eight interest rates in 2022 has still not hit household and consumer demand, he says.

Consumers did not behave the way the Reserve Bank expected them to behave in the previous half. As Warnes sees it, it was a period of “revenge spending,” where Australians were committed spending up, simply to have a good Christmas.

However, now consumers may cut back and Warnes believes this could be a case of the “revenge on the revenge spending”, that is people will now stop spending.

“What concerns me most is an eventual pullback in household consumption and savings falling to pre-pandemic levels.”

Warnes also remains of the view that central banks did not act fast enough to tackle inflation, which rose a stronger-than-expected 1.9% in the December quarter to be 7.8% higher annually, the ABS revealed on Wednesday.

Similarly, AMP chief economist Shane Oliver is watching the inflationary outlook. “If inflation continues to rise, central banks will be more hawkish than we are allowing for, risking deep recession,” Oliver said in an economic note.

Just as consumers will be grappling with higher interest rates and inflation, so too will business confront a challenged year. And here, outlook statements by companies published throughout February will be key.

According to Warnes, it is easier for businesses to boost their capex spend when “money is free and plentiful”.

“But money is no longer free, nor is it plentiful. Watch those outlook statements very carefully.” Warnes believes management will have to come clean on their [capex] plans.

At the same time companies will come under pressure to continue to decarbonise their businesses and with higher inflation, a double whammy for businesses.

Warnes expects the expenditure on decarbonisation “will belt their earnings” and this could also feed into higher prices and therefore higher inflation.

Higher interest rates will also be a major headwind for businesses with higher gearing levels such as REITs.

It’s a challenge that has already been highlighted by Morningstar equity analyst Alex Prineas following the August reporting season.

He flagged that while interest rates didn’t have much effect on fiscal 2022 results, the effect is likely to be more pronounced on financial results, and dividends from 2023 onwards.


Warnes remains very cautious, saying liquidity challenges have emerged as money supply is now at zero growth.

“Money supply, inflation and economic activity are inexorably linked. There is the possibility that the economy will contract but the question will be whether it will be hard or soft landing. My opinion is that we are not out of the woods yet,”

AMP’s Oliver is also watching for signs of a recession. “A mild recession in US and Europe should be manageable but a deep recession will mean significantly more downside in shares,” Oliver says.

“In Australia, the less aggressive RBA along with other factors (such as strong pipeline of home building approvals and a China rebound) should help us avoid recession,” adds Oliver

Cautious but aware of opportunities

Amid this challenged outlook, there are still opportunities for investors.

Warnes remains cautious over the implications for China’s reopening and what it will mean for the miners. He believes there will be upside in the short-term. And certainly, the miners are well placed and will even continue to “spew income through dividends”.

Morningstar also remains bullish on energy despite the shift to renewables.

In Morningstar’s outlook report, a number of energy players have benefited from rising oil and gas prices, and despite the hike in their share prices, Morningstar still sees value. If energy prices remain elevated for longer than expected, value may even be greater.

Further, even though the Federal Government has proposed a price cap on gas producers, the impact will be immaterial given gas sales are higher in overseas markets than in Australia.

“If China fires up, they will want energy not renewables. Renewables does not have the capacity to replace fossil fuel despite what the green machine tells you,” Warnes says.

“It’s not possible to undo what has happened over the last 200 years. Fossil fuels remains a decade long story.”

Among the energy stocks, 4-star Santos (STO) was named on Morningstar's global equity best ideas list. The company is trading at a near-40% discount to its fair value estimate of $12.00.

While most sectors of the Australian and New Zealand markets are now fairly valued, Warnes also sees value in sectors such as technology and real estate. Among the top picks on Morningstar's global equity best ideas list are 5-star Lendlease (LLC) and 4-star WiseTech Global (WTC).

Perhaps the key message is investors can always unearth opportunities, even in volatile or down markets.

It’s a lesson that is often repeated too by Oliver.

“Turn down the noise,” says Oliver. “Investors are now bombarded with irrelevant, low quality and conflicting information which confuses and adds to uncertainty.”

This was particularly evident in 2022, he adds. “The best approach is to turn down the noise and stick to a long-term investment strategy”.