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Amid the gloom, a looming growth gap

The chief executive of the building products group Alesco Corporation, Peter Boyd, summed up the situation facing many corporates rather neatly yesterday when he said the coming year was likely to be tougher than the one his company has just come through.

The chief executive of the building products group Alesco Corporation, Peter Boyd, summed up the situation facing many corporates rather neatly yesterday when he said the coming year was likely to be tougher than the one his company has just come through.

Boyd was talking specifically about the difficulties facing the construction and building product sectors, most notably the weak residential housing market, but his comments about sliding consumer confidence can easily be extended to most other industries.

You'd have to be on another planet not to appreciate the problems facing the retail industry, issues which the Reserve Bank governor, Glenn Stevens, addressed in a speech yesterday in which he acknowledged that widespread pessimism was making life hard for many in the economy.

Stevens (who, of course, has been a contributor to that mood by increasing interest rates to choke off an outbreak of inflation) blamed tremors in financial markets, "increasingly bitter political debates" and a cooling-off in asset prices as reasons why consumers have stopped spending.

For large swathes of the listed corporate sector, that has meant revenue and earnings have been harder to come by in recent months. Hence the recent profit downgrades from a host of retailers and the cautious outlook statements which are emerging as the latest reporting season gets under way.

It was somewhat timely, therefore, that Tanya Branwhite's team at Macquarie Equities has just issued its latest 2011 earnings outlook report, which pulled few punches in terms of what investors can expect over the coming weeks.

In comparison to previous periods when the normal ebbs and flows of economy would determine who would do well and who wouldn't, Macquarie believes this year is different because of a "wrenching structural change" which is driving a "growth" gap between the likely winners and losers.

For the former, read the booming mining and wider resource industries, with most of the rest in the latter. With that in mind, immediate share price performance will be driven more by the delivery of earnings growth - high or low - rather than the normal valuation indicators, Macquarie says.

Not surprisingly, resource companies are likely to be the flyers, with Macquarie highlighting BHP Billiton, Rio Tinto, OZ Minerals, Atlas Iron and PanAust as those likely to deliver strong earnings surprises. They are set to be joined by defensive industrial stocks such as Amcor, Ansell, Resmed and Ramsay Health Care, given they are less exposed to those parts of the economy that are in the doldrums.

At the other end, it will be of little surprise that Qantas, Virgin, Leighton, Harvey Norman, CSR, Fairfax Media (publisher of the Herald), Ten, Bendigo and Adelaide Bank, and the Bank of Queensland are fingered on the list of those companies doing it harder.

All are exposed, one way or the other, to the fickle nature of consumer spending. But such problems are not just limited to domestically-focused companies. Globally-exposed operators such as the insurer QBE, gaming machine supplier Aristocrat, Billabong and News Corporation have their issues to deal with overseas, of which the high Australian dollar is just one.


It's not all bad news for the gambling industry. In the case of Woolworths, consumer staples are not the only sales still ringing strongly for Australia's largest grocer.

The consumer retail strike appears to have bypassed poker machines, according to Deutsche Bank. Good news for Woolies, which also happens to be one of the nation's largest pokie owners via its pubs business.

"Gambling expenditure has remained robust throughout the June quarter as consumers are still spending on recreational and entertainment pursuits," the broker said.

Poker machine revenues for June were up 6 per cent in Queensland, 4.1 per cent in Victoria and 3 to 4 per cent in NSW. Wagering and lottery performance was "sound", the broker noted. Deutsche favourably compared gambling's overall performance for the month with the rising household savings in the March quarter and recent profit downgrades from various retailers, including this week's trimming of Premier Investment's forecasts.

Deutsche says it prefers Crown and Tatts in the sector, particularly noting Crown's beneficial exposure to Macau's strong growth.


National Australia Bank appears to be keeping its own shareholders guessing, as well as Lloyds Banking Group, as to its intentions in Britain, where it continues to grapple with the future of its Yorkshire and Clydesdale Bank subsidiaries.

Lloyds is being forced to sell 632 branches in order to comply with European Union rulings on taxpayer aid after being bailed out by the British government during the global financial crisis. NAB had been tipped as a bidder, seemingly as part of a "bulk up or get out" plan that tends to get dusted down every so often at HQ back here. However, only two formal offers - neither involving NAB - were received for the Lloyds branches by the bank's deadline, which has now been extended to try to tease out further interest.

One hurdle is Lloyds's asking price, said to be #2.5 billion ($3.7 billion). Given the funding gap between the deposits held by the branches concerned and their lending requirements, NAB is an understandable reluctant would-be purchaser.

The price therefore will have to either come down quite substantially or NAB will have to team up with a partner or two to spread the load before its interest firms, which is probably why it didn't lodge an offer by this month's due date.

Additional reporting: Colin Kruger.

Ian McIlwraith is sick.

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