SIMON BROWN: Look ahead, don’t just look around

We’ve all seen it: a company releases an excellent set of results and the market hardly responds — or, worse, the stock actually falls. The reason for this is simple but important.

The point is, markets are forward-looking. They’re slightly interested in what has passed to see trends, market share growth and what’s happened to margins, as examples. But really what matters is what’s going to happen in the future.

So if a great set of results is expected from a company, and it delivers, the market certainly likes that. But the market is looking a year or two ahead. Can the company repeat the results? Was this a one-off and next year it’s back to normal?

Now, we do get some insights in terms of trading updates, which have to be published on Sens as soon as a company becomes aware that headline earnings per share will be 20% better or worse than the previous period. We can also see from competing companies what their earnings have been.

If, for example, a retailer is struggling because of load-shedding, we can assume others in the same sector could be experiencing the same problem.

But mostly we need to be looking to the future.

Take clothing retailers. We’ve seen fair results from them and stock prices are mostly doing very well. This has left many scratching their heads because the consumer remains under pressure from high rates and inflation, something we’ve now had for a few years.

But let’s look a year ahead. An optimistic view could see interest rates a full percent lower after four 25 basis point rate cuts from the monetary policy committee, with inflation at about 4.5%. Add to this a stable and functioning coalition government, and people spending their two-pot monies, and suddenly the under-pressure consumers of today are feeling better.

Now, sure, they’re not out there spending like crazy; rates would still be high and personal balance sheets take time to repair. But a home loan could be a couple of thousand rand less expensive every month, giving real relief to household budgets.

So consumers could well be spending more next June than they are now.

This would be good for the more discretionary retailers, such as clothing, as well as fast-food and sit-down dining.

Then, using this view to predict next year’s earnings from clothing retailers, we’d be expecting better results, which would support higher share prices. A generally more positive view on the local consumer could also see an argument for valuations to expand to higher p:e levels. Both would drive share prices higher.

So next year’s results are already being priced into today’s share prices. Not completely, but over the next 12 months.

Of course, if the positive outcome doesn’t play out, then the surprise is to the downside and that’s nasty.

So remember to always be looking well ahead when investing — try to work out what the picture will be in a year when making today’s decisions.