The reporting season so far has neither excited nor disappointed. Which means the market is likely to be buffeted by overseas currents, not that there is anything new about that. One would have to think that the strength of the $A would be making foriegn investors, about two fifths of the market, feeling nervous about their investments. Macquarie Equities notes some negative signs in longer term earnings forecasts, which does not inspire confidence in the medium term:
“The market’s overall FY12 EPSg forecast is unchanged this week at -3.7% virtually unchanged from the pre-reporting season forecast (-3.8%). FY13’s EPSg forecast however has fallen a full 2ppts across the last four weeks to stand at +7.5% reporting season to date.
The most notable development this week has been the upgrades to the Industrials 2HY12 EPSg forecast, which has lifted from an already strong +9.4% to a stellar +10.5%! While we would highlight that previous reporting seasons have seen periods of better than expected EPSg delivery, previous positive earnings surprise were in the context of weak to –ve EPSg forecasts.”
Deutsche Bank comments that part of the reason results are OK is that the downgrades had already occurred prior to reporting season. Which has interesting implications for company strategies. Is it better to give the bad news early or later?
Deutsche notes that defensives are doing the heavy work:
“While industrials growth has picked up a little from the last half, defensives are doing all of the work. Defensive earnings are up ~12% on pcp, the best growth in three years. Healthcare is a key driver of the pick-up, with the stable AUD no longer presenting a headwind. In contrast, cyclical industrial earnings fell yearon- year, and growth has been trending down for two years. These divergent trends are of course consistent with the rise in both defensive stocks’ share prices and PE ratios, relative to cyclicals, in recent months.”
It is probable that the defensive play has run its course and cyclicals are becoming the better option, but it very much depends on international developments. Probably the biggest negatives are coming with resources. The mining boom is not translating into a mining shares boom:
“Resources continues to see the most significant downgrades with 2HY12, FY12 and FY13 EPSg forecasts all seeing downgrades (6.7ppts, 1.3ppts & 3.5ppts respectively) leaving the sector’s forecasts at -27.1% for 2HY12, -15.1% for FY12, and +11.1% for FY13.”
Given the growing signs of weakness in the Chinese economy, the focus is probably shifting more to trying to pick the bottom in resources.