As the June 30 reporting season comes to an end, how did it go and what does it mean for the outlook for rest of 2010 and into 2011?
Only a handful of companies remain to report today and tomorrow.
We did see a better tone to last week’s reports, especially from companies servicing the resources sector and the media.
Harvey Norman did report a small rise in annual profit on Friday, but that hid a 37% fall in second half earnings as sales growth disappeared.
Lihir Gold lifted its profit ahead of the merger with Newcrest which is now heading for completion.
Fairfax returned to the black, the Ten Network revealed a sharp rise in profit in upgraded guidance and the Seven Media Group also reported a rise in earnings as well on Wednesday.
But it still hasn’t changed the feeling that the results were on the whole uninspiring (except for the likes of most media stocks, BHP, Rio Tinto, Wesfarmers, and perhaps Woolworths).
The AMP’s chief strategist, Dr Shane Oliver says that the "good news was that 72% of companies saw profits rise (see chart above), led by the resources, banking and media sectors, resulting in an aggregate gain in earnings per share of around 6% in 2009-10.
"Dividends also crept higher.
"However, only 39% of companies surprised on the upside, which is down from 49% in the February reporting season and 57% at a similar stage in the last recovery cycle in August 2004.
"Company outlook statements were also cautious with the ratio of positive to negative comments running around 2 to 1 compared to 6 to 1 during the last reporting season.
"Reflecting the lack of upside surprise and cautious outlook statements, consensus earnings expectations for 2010-11 have been revised down by about 3%, taking expected earnings growth to around 17% for this financial year.
"Other themes have been a loss of momentum for the banks, some improvement in retail momentum and good cost control."
Among the reports expected today will be a flood of small loss-making miners and small industrials that will be trying to escape attention.
But profits will come from the likes of Beach Petroleum which is due to report today as is Infigen Energy (full year earnings) and Macquarie Atlas Roads Group (created through the restructuring of Macquarie Infrastructure Group) which is due to release its interim.
UBS downgraded fiscal year 2011 earnings by 3% last week.
JPMorgan scaled back its prediction of gross domestic product growth for 2011 from 3.2% to 3%, but other forecasters still have growth running at 4% for 2011-2012.
The ASX/200 Index has fallen from 4566.1 points on August 8 to 4356 on Thursday, a drop of around 4%, before the small bounce on Friday.
To date, Australia’s economy has remained strong, driven largely by China’s demand for locally mined iron ore, coal and other resources.
But that maybe about to change with news on the weekend that Vale, the big Brazilian iron ore group, had cut its 4th quarter global iron ore price by 10%.
That will have some impact on the market’s thinking about BHP and Rio, although BHP is now under some suspicion because of its play for Potash Corporation.
Vale’s decision, made as part of a quarterly revision of market prices, comes after a fall in demand in China, the top global customer.
It also slightly reverses the 170% jump in iron ore prices seen this year in response to China’s surging demand, which is now falling with steel production down 8% in the past couple of months.
Australian mining exports have underpinned demand for goods and services – and workers – which in turn buoys profits for companies, especially those serving the resources sector where the likes of Macmahon, Leighton, Mac, and Campbell are all doing well.
Dr Oliver said in commentary over the weekend that worries about a dip back into global recession now escalating and policy makers in the US and China unlikely to respond immediately, "shares are at high risk of having another leg down, particularly as we head into the normally weak months of September and October.
"However, beyond the likelihood of another round of near term share market weakness we remain of the view that a double-dip recession globally will be avoided and with shares offering very good value, the US Federal Reserve likely to embark on another round of quantitative easing and China likely to start relaxing its tightening measures sometime in the next few months, shares are likely to stage a decent rally in the December quarter and then through 2011.
"It’s likely to remain a volatile and constrained ride though."
He said the "$A is likely to remain under pressure in the short term, particularly with double dip fears persisting, continuing uncertainty following the Australian election and the next interest rate hike in Australia being pushed out, but should rise on a six to 12 month horizon as it becomes clear that the global recovery is continuing (albeit very gradually in developed countries), commodity prices are remaining strong and that Australian interest rates are remaining well above global rates".
