All eyes on resources sector in run-up to profit season

INVESTORS are unlikely to be caught offguard by too many negative profit results this season, but resource companies with local operations could still disappoint, analysts have warned.

INVESTORS are unlikely to be caught offguard by too many negative profit results this season, but resource companies with local operations could still disappoint, analysts have warned.

With the half-year profit reporting season starting in earnest next week, the usual "confession" period - where companies reveal if they are expecting a fall or an increase in profits - has been benign for local stocks, with few negative surprises.

With the tough global economic conditions of the past six months, analysts say they are simply looking for companies to meet profit expectations.

But they also say investors' expectations have become more conservative, given their experience of the past two years where each year began with expectations of 10 per cent underlying profit growth but ended with expectations of no growth.

This could work in companies' favour this season, particularly if they report better-than-expected profits.

"Similar to the US, what we're looking for is for companies to meet expectations so that the market will be happy," the UBS investment analyst Abby Macnish said. "Obviously there's always going to be some misses but at the moment it's looking quite benign.

"A lot of these companies have really solid balance sheets, they don't need to go to market, so there won't be too many surprises there. We just need them to really consolidate those earnings and start planning for the next few years' growth."

But fund managers have singled out the resources sector as one area of the economy that could still surprise with profit downgrades.

Australia is one of the few advanced economies that has not engaged in unconventional monetary policy. As a result, capital has continued to flow into the Australian dollar, which has prevented miners from getting cost relief, they say.

"On the mining side we're a bit more concerned," the Watermark Funds Management director Justin Braitling said.

"Production numbers have been OK - we've seen that from the iron ore companies - but we're concerned that costs continue to move higher and that there's not been any currency relief even though commodity prices have fallen," he said.

Mr Braitling also said the outlook for industrial companies remained cloudy, but conditions seemed to have stabilised in the past six months.

The currency had been stable for 12 months and the domestic economy had not deteriorated further, with lower interest rates providing some support, he said.

"So the downgrade cycle [for industrial companies] looks to be abating, as those headwinds haven't got any worse. In the last quarter we haven't seen the sort of downgrades we've been seeing over the last couple of years and that's good news for the markets," he said.

"As a consequence, analysts' expectations are set at conservative levels so we would expect the results to be OK."

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