Despite the strong rise on the share market over the past year, expectations for the forthcoming company reporting season are decidedly flat.
After a 2012/13 financial year that featured a slowdown in China’s economy, an accompanying drop in commodity prices, the tapering of mining investment in Australia and a national mood stuck stubbornly in gloomy territory, market watchers are expecting a repeat of reporting season 2012.
A year ago, Australia’s reporting season showed a 23 per cent decline in aggregate profits from the year before.
While current expectations are for company profits to hold relatively steady, the same muted outlook and lack of strong growth that characterised 2011/12 is expected to continue.
AMP Capital head of investment strategy Shane Oliver says market consensus is for a 0.5 per cent decline in overall profits for the 2012/13 financial year.
“The share market is looking quite upbeat, whereas the broader economy is looking pretty depressed and that’s likely to be reflected in the profit figures,” Dr Oliver said.
“As we go into this reporting season, there’s been a degree of trepidation on the part of investors.
“There have been a number of profit warnings already.”
The S&P/ASX200 rose by 17.3 per cent in 2012/13, according to CommSec, with pharmaceuticals and biotech companies the strongest performers and consumer durables and clothing companies the weakest.
However, chief investment officer at fund manager Intelligent Investor, Steve Johnson, said the broad outlook for companies was no better than it was a year ago.
“And I don’t think you’re going to hear business say it’s getting better,” Mr Johnson said.
Interest rates are at record lows and likely to go lower, meaning investors want stocks that can pay an income stream, and will not be happy with performances that fall short of guidance.
“With interest rates where they are, businesses don’t need to shoot the lights out but need to deliver on expectations – for those that miss, the punishment can be very severe,” Mr Johnson said.
Defensive stocks such as banks and Telstra were strong performers during 2011/12, and are likely to remain favourites.
But Mr Johnson expects performance will track closely with market capitalisation rather than particular sectors, as larger companies are better placed to withstand shocks.
Mr Johnson also sees a glimmer of hope for companies with US earnings and Australian costs that could benefit from the movements in the Australian dollar.
The local currency has now fallen to a three-year low of just under 90 US cents.
“I don’t think people have fully factored in how much of a positive impact that’s going to have,” Mr Johnson said.
“People don’t generally factor in the underlying growth from being a more competitive business.”
China’s slowdown has cast a pall over the mining sector and small miners in particular, with the small resources accumulation index falling more than 32 per cent in 2012/13, while the broad All Ordinaries accumulation index gained nearly 23 per cent.
Despite the loss, Mr Johnson thinks some small miners and mining services companies will be able to beat expectations because fears about the future are not yet reflected in current revenues.