The Importance Of Profits

By Glenn Dyer | More Articles by Glenn Dyer

The Australian June half profit reporting season starts in earnest this week with companies such as AXA, Resmed, Stockland, Coca-Cola Amatil, News Corp, Bradken and Telstra due to report.

They will be doing so amid the most volatile market conditions for years.

Investors will also have to cope with an almost certain interest rate rise on Wednesday, although that could be stopped if there are a couple of extra sharp falls in US markets and here because of the fear factor.

Already, confidence in the most important sector, resources, has been rattled by the unexpected size of the 14% fall in net earnings by Rio Tinto late last week.

Analysts and investors are looking to BHP Billiton to do a lot better when it reports next week.

This reporting season will hopefully delineate the difference between us and the US where the sub-prime mess seems to have spread into the wider economy. It certainly has battered confidence across the board.

Macquarie Bank's involvement through Macquarie Fortress helped knock confidence levels here last week and despite the confident finish on Friday, this week will start down because of the sharp fall on Friday night in the US.

That's why a lot of investors, fund managers and analysts, will be hoping quite a few Australian stocks surprise on the upside when revealing earnings over the next few weeks.

We are part of the China growth story that, while getting a bit mature, still has legs.

That is a far different driver for our economy than what America has experienced and will experience in the next six months.

We face a possible rate rise here to slow the economy and inflation: the next move in the US will be down as a result of the impact of the sub-prime mess and the contraction in credit and liquidity.

We do face the prospect of lower commodity prices if the US economy weakens, but China will be there to absorb some of the slack and take the pressure off prices: resource companies might not like that but it will be a help if oil prices decline, cutting petrol prices and easing inflationary pressures here.

Our dollar's current rate of more than 85 USc may be off the recent high of 88.71 USc but it's stiller reflecting the view that our economy, profits and outlook are better than in the US.

Stronger earnings reports and solid dividend flows will go some way to easing concerns and helping investors cope with the increased volatility.

But that doesn't mean there are no potential trouble spots.

The confidence question about Macquarie Bank will be around for a while; questions about the involvement of other investors in other forms of credit market securities will be asked and we have to remember that a big company collapse or huge loss on the US could be highly damaging to confidence levels, even here.

The Bear Stearns investment bank, the fifth-largest in the US, is the one to keep an eye on.

Its earnings are going to fall after three hedge funds it sponsored got into trouble. A very senior executive in charge of credit products is said to be about to be fired, the firm's credit rating is on creditwatch negative. It's the biggest victim in the US so far of the mess it helped create.

Rio apart, the companies to have reported so far have been mainly investment groups such as Australian Foundation and Milton Corp and they were historical profits because of their involvement in the market: we have so far not had any sign of how companies involved in the wider economy (non-resources) have gone.

A flow of good earnings will go a long was to re-assuring investors that we will not be rattled like US stockmarkets are being shaken.

The AMP's Dr Shane Oliver says: "We expect another good reporting season with profits slowing from last financial year's 21% pace but still strong at around 15%".

He says investors should be looking for the key themes from this reporting season to be the ongoing strength in the resources sector despite Rio's lower interim earnings; a pick-up in profit growth for the industrials (ex financials) to around 11% after just 3% a year ago thanks to stronger domestic conditions; poor results from stocks exposed to the strong $A and the US housing market; and ongoing strength from banks and asset managers.

"The risk is that if investor sentiment remains negative good results will be ignored and companies that miss expectations will be punished severely."

Telstra is the one to watch this week. If it does better than expected then that will help confidence.

Speaking on ABC TV yesterday, the CEO of the National Australia Bank, John Stewart, was confident about the outlook for us, even if the US slows.

The Australian economy would also largely withstand any weakening in the US economy, he said.

"The implications for Australia luckily are quite small because there's no direct effect in Australia," he said.

"We still don't think it will have a major effect on GDP (gross domestic product) in Australia simply because our major trading partner right now is China and there is a huge trade with China."

Mr Stewart also said there was a 50/50 chance that the Reserve Bank of Australia would lift interest rates after it meets on Tuesday.

"I think there is probably a 50 or 60 per cent chance they would, but they may just look at what's going on in the world just now and say leave it for an extra month", he told Inside Business.

China remains one of the defining differences with Australia.

Our trade with that country and India is now growing faster than with anyone else. (Although we are also importing faster from the US than we are exporting goods: so much for the Free Trade Agreement.)

The difference between Australia and the US can be seen in a statement in Shanghai at the weekend

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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