Investors are flying blind into the ASX profit reporting season, which officially kicks off in two weeks, but there are three things we are likely to encounter.
I am not talking about volatility, although you can expect a lot of turbulence as the COVID-19 pandemic creates a thick fog of war.
It doesn't help that the market is pricing in a "V" shape recovery either when a number of key S&P/ASX 200 Index (Index:^AXJO) sectors look to be stuck in an "L" instead.
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Not just about profits
While travel stocks like the Qantas Airways Limited (ASX: QAN) share price are the obvious profit season sinners, the outlook for a wide range of industrial and financial stocks are still up in the air.
But the profit figures are only but one thing that impacts on ASX share prices. There are a number of other developments that will drag on stocks, and some of these are easier to predict than earnings.
Capital raising on the rise (again)
One thing I am expecting that will leave a big mark on the earnings season is capital raisings. While we have seen several high-profile companies rattling the can for cash since the start of the coronavirus pandemic, I think we will see more.
My view was reinforced by the share market operator ASX Ltd (ASX: ASX) extending its temporary emergency capital raising relief.
The relief, which is aimed at helping cash-strapped ASX entities hit by CIVID-19 to raise urgent capital, was meant to expire by the end of this month. But it will now be extended to the end of November 2020.
This means we could see more companies take advantage of this window, especially if their auditors are reluctant to sign off on their accounts.
More big write-downs to come
Another likely feature of this reporting season to watch for are write-downs. Companies hit by a sharp downturn in trading conditions will be pressured to devalue assets.
We have already seen this happening in the energy sector. The dramatic crash in the oil price this year forced Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG) to write-down the value of their assets.
Property groups have also been shaving down the value of their portfolios, although I don't think they are quite done yet.
I also think that ASX stocks in other sectors will also be contemplating such a move. While the devaluation of assets does not usually impact on cash, the move will impact on bottom lines. It could also endanger debt covenants for companies that have put up assets as collateral.
Limited guidance for FY21
The third feature of the reporting season is earnings guidance – or the lack of it. Any company that was feeling a little more confident about their outlook would likely be pulling their head in after Melbourne went into a second COVID-19 lockdown.
What's worse, a small but growing number of coronavirus cases in New South Wales will be adding to the suspense.
It will take a brave board to be giving any predictions for FY21 in this climate. As I have reported before, Macquarie Group Ltd (ASX: MQG) is predicting that only half of ASX companies that usually gives guidance will do so this time round.
That figure might even prove to be too optimistic.
