The AMP’s chief economist and Strategist, Dr Shane Oliver says there was a lot of uncertainty going into the recent earnings reporting season.
In the event it wasn’t as bad as feared. This is fairly similar to the picture provided by December quarter GDP data on Wednesday.
A month or so ago there was concern that it might be negative, but it has come in at 0.7% quarter on quarter or 2.7% year on year.
However both the earnings reports and the GDP figures disguise a very diverse picture beneath the surface.
Reporting season wrap up
The good news is that the December half profit results have been better than feared and there were no major blow ups.
This is reflected in share price reactions that were split evenly between companies seeing their share price outperform the market on the day their results were released versus those whose share prices underperformed.
This is reinforced by the fact that the market was able to rise 1.6% though February, despite global oil supply concerns at the end of the month.
Most importantly, profit momentum is still up with 67% of companies having reported a rise in profits on a year ago.
However, only 37% of companies have beaten expectations, which are down slightly on the August reporting season last year and well below the norm over the last seven years of 46%.
The proportion reporting a negative surprise rose to 32%, the highest in two years.
Disappointingly the ratio of positive to negative outlook statements has slipped from almost 6 to 1 in the February reporting season a year ago, to just 1.5 to 1 in the recent reporting season.
Quite clearly, the uncertainty over the domestic economic outlook has weighed on corporate confidence, particularly with real private final demand only up 1.6% over the year to the December quarter.
Reflecting this, analyst revisions to earnings expectations have generally been negative in Australia.
The next chart shows that the number of Australian companies seeing their earnings forecasts being revised down by analysts has continued to outweigh the number of companies seeing upgrades.
This contrasts to the global picture where upgrades continue to dominate.
The downgrades are concentrated amongst steel makers, general insurers, telcos, diversified financials, contractors and discretionary retailers.
Fortunately, on a capitalisation weighted basis, consensus earnings expectations are little changed reflecting strong results from resources and banks.
Consensus expectations for earnings growth are 15% for this financial year and 14% for 2011-12.
Key themes
Several key themes are apparent.
First, while aggregate profits are up 20% over the year to the December half the results confirm the three speed economy.
Thanks to a huge surge in commodity prices which has boosted revenues even though overall mining production is subdued, resources companies have shot the lights out with 65% earnings growth over the year to the December half. However, this was as expected.
The big surprise was banks, with most surprising on the upside with December half results or trading updates.
Bank profits are up nearly 25% over the year to the December half on the back of modest revenue growth, but good cost control and interest margins having held up better than expected.
As a result, bank results were mostly well received by the market.
Industrials ex banks have seen flat to slightly negative profit growth (or a small gain if Telstra is excluded).
Telcos, diversified financials, discretionary retailers, gaming, utilities and health all saw falls in profits with general insurers flat but gains elsewhere.
Interestingly, the market has been prepared to give the benefit of the doubt to companies adversely affected by poor macro economic conditions or the weather (e.g. Aristocrat, Brambles, David Jones and Leighton) but took a harder line against companies with fundamental problems.
Second, Australian companies are starting to return cash to shareholders via increased dividends or share buybacks.
77% of companies increased their dividends from levels a year ago.
With corporate cash holdings at record levels and gearing low, there is plenty of scope for further increases in dividends and buybacks going forward, both of which are positive for the share market.
Finally, there is more evidence that cost pressures are starting to creep back in. 2008-09 saw widespread cost cutting in anticipation of bad times with talk of an approaching global depression.
That didn’t happen, but we are now starting to see cost pressures creep back in the form of higher raw material costs and a gradual pick up in wages growth.
To be sure, wages are coming from a low base.
But, unlike in America where jobs growth has been anaemic and so productivity has surged, solid jobs growth in Australia has seen poor productivity growth and more upwards pressure on unit labour costs.
So where does this leave us?
Analysing the Australian economy and corporate sector has been made difficult by various cross currents including the floods, the huge boost to nati
