Company reporting season key for sentiment
Australia is in its third year of earnings recovery post the GFC and while Australian stocks remain well-capitalised on the whole, local economic data, along with the strong Australian dollar and continued Eurozone uncertainty, are likely to culminate in low single-digit earnings growth throughout FY12.
The market has already lowered its expectations for FY12 earnings from 16% (in June 2011) to 4.3% (in February 2012). The largest downgrades have been in the resources sector (reflecting lower commodity prices), although financials have also been reduced lately, in light of the recent profit warning from QBE Insurance.
As FY12 forecasts have been lowered, FY13 forecasts have been rising (partly reflecting base effects), but at 14% they remain optimistic. The main wildcard here is commodity prices. If they can continue to reverse recent falls, then the market forecasts could be achieved.
Elsewhere, the assumed expansion in non-resource sector earnings will be challenging if the domestic economy grows slower than trend. Tighter financial conditions are making this task harder. For example, when the European Central Bank attempts to ease financial conditions in Europe, they effectively tighten them in Australia through the impact on the currency. The RBA has clearly stated that conditions would need to tighten further before domestic rates can be lowered.
For more on this, my February Perspective will shortly be available from our website.
For more on the company reporting season, Financial Advisers can tune in to view Michael Pascoe interview Matt Williams, Head of Equities and Paul Skamvougeras, Portfolio Manager, about their findings. Contact your Account Manager for details.
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