SYDNEY (BLOOMBERG) --Australia is expected to post the worst profit growth in Asia next year as a weak domestic economy stokes consumer caution and the banking sector deals with a litany of scandals.
Earnings for the S&P/ASX 200 Index are seen rising 4.2 per cent, less than half the increase that MSCI's broadest measure for Asian stocks is expected to achieve, according to data compiled by Bloomberg. Australia's benchmark index reached a record high last month and is tied with Taiwan as the region's second-best performer in 2019.
Record low interest rates have helped prop up the benchmark index and overshadowed troubling economic signals for corporate Australia, said Aaron Binsted, a portfolio manager at Lazard Asset Management. The nation's economy slowed last quarter as cuts to mortgage rates and taxes failed to spur household spending, which grew at its slowest pace in a decade.
"It's a bit of a grind here for the domestic Australian economy," said Adrian Ezquerro, head of investments at Clime Investment Management Ltd. "You can see that in the earnings forecasts."
Banks, which make up a large portion of Australia's benchmark, are also bringing down earnings expectations for the broader market, Ezquerro said. Mounting misconduct costs, lack of credit growth and falling interest rates from the Reserve Bank of Australia are eating into profits. Earnings for the nation's biggest lenders are set to be the lowest since late 2010, data compiled by Bloomberg show.
"We're yet to see strong drivers of profitability," said Dermot Ryan, a portfolio manager at AMP Capital Investors Ltd. "The consumer is cautious, we see it across media and consumption at the moment."
Still, investors should be able to look through short-term softness in companies exposed to the nation's rebounding property market, said Natalie Tam, investment director for Australian equities at Aberdeen Standard Investments.
"The RBA edging rates down has really supported the housing market, and over time, that will support consumer spending," she said. "It's just that it's going to take time."
Sell-side analysts remain cautious about the outlook for Australia, with buy ratings on ASX 200 stocks languishing near 16-year lows, according to data compiled by Bloomberg.
Earnings will continue to moderate until an economic revival kicks off late next year, Morgan Stanley strategists led by Nathan Lim wrote last month. The weak outlook "amplifies" stretched valuations on the nation's benchmark, prompting the broker to downgrade Australia in favor of international equities.
Goldman Sachs Group is forecasting a global economic recovery next year, but is skeptical Australian shares will see much benefit.
"We are more cautious on the near-term outlook in Australia given macro data have continued to disappoint," analysts led by Matthew Ross wrote in a Dec 3 note. "Domestic cyclicals have been left behind in the recent global rally, and we expect this trend will continue."
Even so, Goldman still sees some winners, including miners and companies with strong offshore earnings that are likely to benefit from a global economic recovery, the analysts wrote.