Analysts divided on sustainability of rally

Australia's biggest companies began to open their books to investors this week, for their annual profit unveiling. Telstra, Cochlear, Leighton Holdings and Crown were among those to do so. Rio Tinto opened its half-yearly books.

Australia's biggest companies began to open their books to investors this week, for their annual profit unveiling. Telstra, Cochlear, Leighton Holdings and Crown were among those to do so. Rio Tinto opened its half-yearly books.

So far investors have responded well, with the ASX/200 Index this week gaining 55.82 points, or 1.3 per cent, to 4277.3. It helped that local economic data, such as Thursday's decline in unemployment, have been positive.

But shareholders have been cautioned to keep hopes for positive surprises fastened to the ground. If anything, they've been advised to prepare for bad news.

Companies learned this time last year, when investors reacted brutally to unexpected profit declines, that unrealistic expectations can be a bad thing. So this time around, if there have been pre-announcements, they have been of profit downgrades, not upgrades.

Thus, when Rio Tinto reported a decline in earnings on Wednesday, a fall of 22 per cent to $US5.89 billion for the first six months of the year, the market took it in its stride.

For the week, Rio shares jumped $4.44, or 7.8 per cent, to $56.45.

Some analysts have pointed out that the market has risen 13 out of the last 21 days, leading to questions about the likelihood of a longer and more sustained rally. But others wonder if the rally really is a sign that things have actually improved.

Deutsche Bank's Tim Baker says that the rally is atypical and should be treated with caution. His reason? Banks and defensive stocks have been the key drivers, while cyclical industrial and resource stocks have done little.

As he noted last week: "The lack of interest in cyclicals does not inspire much confidence in the durability of the upturn, and is reminiscent of the March-April rally which ultimately faltered.

"If the market is to continue its recent momentum, cyclicals have to contribute. [But] this seems unlikely to occur in the very near term."

Yesterday, Tabcorp shares fell a further 9 per cent, to $2.91, after analysts downgraded the stock despite a solid result on Thursday.

Analysts have taken issue with the company's earnings outlook, factoring in additional costs from the loss of its Victorian poker machine duopoly from next week and less favourable terms for its new wagering licence in Victoria.

For the week, Transurban fell 30? to $5.69, after it said it was considering the future of one of its toll roads in the US after a drop in its value halved full-year profits.

Cochlear fell $1.85 to $62.90, after its full-year profit fell 68 per cent following a costly recall of an ear implant, with the company pinning its recovery on the demands of an ageing population.

Crown rose 13?, at $8.56, after its full-year profit rose 53 per cent.

Leighton rose $1.11 to $17.11 as the construction firm expects profit to increase threefold in the second half after the completion of its troubled Brisbane Airport Link and Victorian desalination project.

Qantas rose 4.5? to at $1.14 as the industrial umpire ruled in the airline's favour in a long-running dispute with the Transport Workers Union. The airline can now use as many contract staff as it likes.

Stockland fell 19?, at $3.19, after the property developer said real estate markets were at their worst in 20 years due to weak consumer confidence.

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