One year ago, with the world entering a pandemic nightmare, who could have predicted the amazing first half reporting season just gone? Now, with bond rates climbing, the big question for investors is what lies ahead.

We expected the results season just ended to be a positive affair. COVID’s grip on the economy gave companies doing it tough ample opportunity to confess or warn the market of their challenges. The consequence was one of the strongest reporting seasons we can recall with the majority of companies exceeding expectations, especially in terms of cash flows. Where it was even remotely possible, companies delivered improved earnings visibility which gave the market confidence.

The market is now looking forward and paying particular attention to the mix shift from goods to services including travel. With the market tentatively expelling fears of further lockdowns and border closures, companies selling goods with ultra-short sales cycles such as discretionary retailers were relegated to the Yesterday’s Winners basket.

This was evident during reporting season. Even though many discretionary retailers provided a picture of very strong trading conditions, the expectation that top line growth rates would slow and reflect normal economic conditions – without the benefit of direct government support or the online shopping freedom afforded by working from home – mitigated the prospect of further re-ratings.

Kogan is an example of this shift in sentiment. The company reported gross sales of $638.2 million for the half year, up 97.4 per cent on last year, while revenues increased 88.6 per cent to $414 million. Kogan’s active customers also jumped 77 per cent to three million.  However, with the pandemic over, the EBITDA multiple was simply too high given anticipated inevitable slowing revenue comparisons.  Kogan’s shares are now 44 per cent lower than the October 2020 high and 36 per cent lower than the high recorded in January 2021.

Technology companies had a mixed reporting season. As noted above, e-commerce results were blockbuster but they only provided an opportunity to sell, with analysts and investors anticipating a mix-shift away from goods towards services such as travel as the economy reopens. Elsewhere, data centre owner NEXTDC upgraded its results for the half-year. This is significant because it’s the first time the company has done so. Its earnings reliability means the company has excellent visibility and the numbers tend to be baked in earlier in the year.  To upgrade at the half year, suggests trading conditions are very strong.

For REIT’s the message was that rental forgiveness is over and the relationship with tenants returns to normal, meaning if the tenant can’t pay, they can move on.

For travel, media and student-related stocks, vaccine optimism has permeated the market.  The market already knew that Webjet and Corporate Travel Management had a tough time so investors focused on their cost structures. Importantly, we understand Webjet’s Online Travel Agency doubled its market share during the period incorporating the pandemic.

Housing related stocks generally have a solid outlook given the longer sales cycle as well as a boost from a 53 per cent jump in mortgages in February year-on-year.

Finally, mining services really bore the brunt of COVID-related lockdowns however for companies such as Seven Group and Alliance Aviation Services it meant mouthwatering prices.

All that said, the key takeout from reporting season was the huge appetite for risk reflected in the willingness to switch to the beneficiaries of reopening, funded by the sale of the lockdown beneficiaries.

Notwithstanding a black swan, the outlook for many sectors is otherwise somewhat predictable. The swing factor will therefore be interest rates, inflation expectations and the central banks’ response. Higher rates have a deleterious effect on the present value of future earnings and therefore on intrinsic values. Should bond rates continue to climb, significant exposure to long duration growth companies could prove interesting.  Conversely, attractive prices are being presented in higher quality defensive growth companies.

The Montgomery Funds own shares in Webjet and the Montgomery Small Companies Fund owns shares in NEXTDC. This article was prepared 03 March with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.