After years of cost cutting their way to earnings growth, Australia's listed corporate sector is finally showing signs of getting on board with the global economic recovery.
The latest reporting season has "changed the tone", Martin Currie chief investment officer Reece Birtles says. "What's been hugely different this time is that actual results have beaten consensus forecasts on sales growth by a long way".
"That's completely the opposite to reporting seasons over the past few years," Birtles adds.
Previously it's all been sales disappointments and cost control. Now there are cost pressures and the attendant margin shrinkage. The good news is that at this point, with wages still well contained and the economic background sold, plenty of that revenue expansion is flowing through to the bottom line. It's a bit of a sweet spot.
The ASX's main affliction over the past five years or so has been that the industrials component of the market - essentially, excluding resources names - has struggled to grow the top line at all. As Birtles says: "It's very hard to grow profits when revenue growth is 2 per cent".
But the February reporting season showed sales growth has "popped" to 5 per cent, a very promising development.
A big part of the story is that robust global growth and the return of inflation looks to be finally making its way into corporate Australia. Purchasing managers' indices - the best indicator for current economic activity - point to upbeat operating conditions for businesses around the world. Set against this background, Birtles believes Aussie equities have the potential to grow earnings per share at a double-digit rate.
For a long time it was only about the United States. Then other major regions such as Europe joined in. It's looking like it's Australia's turn to join the party, and from a much more favourable starting point than Wall Street, where earnings are above their pre-GFC highs, valuations are stretched, and the Fed is moving to tighten policy as inflation stirs.
"The problem is that when the US sneezes the world catches a cold, so if the US rolls over we won't be safe from a share price point of view. But from an earnings cycle point of view we have a lot longer to run in Australia before you hit too high a capacity utilisation."
The stirring of corporate animal spirits is also evident in "a big turnaround" in capital expenditure and investment. Capex growth among the top 200 companies jumped to 10 per cent over the past 12 months. Jump back a year and that number was -14 per cent. All of which bodes well not only for future of the sharemarket, but also for the sustainability of our economy. This turnaround is evident in the performance of the likes of Seven Group via WesTrac, the caterpillar equipment dealer. That has been one of Birtle's fund's best performers.
In this environment he says he is keen on the "higher quality cyclical names" for his Legg Mason Martin Currie Select Opportunities Fund. The top five holdings include Woolworths, JB Hi-Fi, IOOF, Coca-Cola Amatil and AGL Energy. In resources he sees opportunities in nickel miner Western Areas and zircon producer Iluka Resources. He likes the energy space, and Oil Search and Woodside in particular.
The fund manager has a lot to say about Woolworths. He disagrees that the supermarket sector is structurally challenged thanks to the entrance of powerful new competitors such as German discount store Aldi. He believes Woolies wounds were self-inflicted: its products became too expensive against big competitor Coles and they suffered the consequences.
"With Woolies it was supposedly about Aldi; we always thought it was about Woolworths versus Coles."
He expects Aldi to continue to take market share, but it will come at the expense of the independent supermarket sector, such as Metcash's IGA network, or smaller specialty shops such as butchers which collectively have about 20 per cent of the market now.
"Since Woolies has got its act together the independents have gone from losing one or two points of market share per year to about six - so they are the ones suffering."
With pricing back under control, the supermarket owner is now enjoying the pulse of global inflation that has let it lift prices and grow sales revenue at a faster pace.
"You don't have to pay your staff more straightway so maybe you get a bit more profit growth," Birtles says. Wednesday's national accounts showed household income growth accelerating to around 4 per cent, around double what it was a year ago.
"That makes households feel better even though they don't have wage inflation."