Sizzle but no steak

Published in the Herald Sun, Melbourne, August 2012 by Karina Barrymore

Week one of the 2012 profit season is over and the scene is already being set for a gloomy reporting season from Australia's biggest corporations, with investors once again left waiting for the bulls to return to the market.

Good news and higher share prices were thin on the ground as shareholders quickly sold out at lower prices during the week-long fest of profit falls and subdued forecasts.

Despite the odd exception, mainly Rio Tinto, whose share price rose despite a profit fall, most shares tumbled after companies reported profit falls or gloomy outlooks or both.

Many investors had expected a return to better times this year, hoping the sharemarket bulls would toss prices higher, as the ripples from the global financial crisis finally taper off.

Although the professional market-watchers are taking the gloom in their stride, the exceptionally poor start has still surprised the experts.

"Normally the companies with good results go first and it gets worse as reporting season progresses," AMP head of investment strategy Shane Oliver said yesterday.

"It won't be good if the companies that reported over the past week are actually the ones with the good results," he added.

According to Mr Oliver, of the 18 companies that have reported their June 2012 full year profit, only 22 per cent have come in with better than expected results. This is almost half the normal trend of about 43 per cent.

A further 34 per cent of companies have had worse than expected results, compared with an average 24 per cent since the GFC.

"The disappointment has been reflected in the share price reactions, with 65 per cent of companies to have reported so far seeing their share price fall," Mr Oliver said.

"Hopefully the results won't be as universally bad over the next few weeks, but they are still likely to be pretty poor nonetheless."

Wilson HTM senior analyst Ivor Ries said the bulls were still waving the white flag. The gloomy outlook will continue to dominate because of ongoing fallout from the global economic slowdown, a high Australian dollar, low housing investment and weak retail sales "as tight-wad consumers’ switch to buying online"

"These trends are likely to persist through this financial year, so we can expect to see further modest downgrades 3-5 per cent to analysts' forecasts for the current financial year," Mr Ries says. "Companies that are doing well are those in non-trade exposed sectors such as healthcare, or which took advantage of under-geared balance sheets to buy someone else's distressed assets.

"Computershare and AGL fit into that category and will continue to benefit over the next two years, and their acquired businesses deliver earnings growth."

Investment analyst Janine Cox, of fund manager Wealth Within, said the Olympic Games are proving a welcome distraction for shareholders.

"I think the Olympics are timely, given that while investors are distracted during this reporting season, it's likely to soften the impact of yet another largely downbeat reporting season,' Ms Cox said yesterday.

"However, once it is over, the focus will be squarely back on financial markets.

"The retail sector will continue to remain well below pre-GFC levels and the resources and materials sectors will continue to feel the pinch. That said, 2013 is likely to be a turning point for our market and I think most investors and brokers just want to see conditions return to normal."

IG Markets analyst Stan Shamu said most investors should take the gloomy profits in their stride. But downgrades for the year ahead were worrying.

"What is perhaps more concerning are some of the downgrades we have seen in 2013 earnings," Mr Shamu said. "There are some big names on the calendar next week and we expect to see a similar theme but what will make a difference will be forecasts for FY13."

Among the companies to report next week are James Hardie, JB Hi-Fi, Commonwealth Bank, AMP, Brambles, Wesfarmers and Newcrest.