Calm waters expected for profit results
With the half-year profit reporting season kicking off 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 companies report better-than-expected profits.
UBS investment analyst Abby Macnish said: "Similar to the US, what we're looking for is for companies to meet expectations so that the market will be happy.
"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."
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 avoided unconventional monetary policy. As a result, capital has continued to flow into the Australian dollar, which has prevented local miners from getting cost relief.
Watermark Funds Management director Justin Braitling said: "On the mining side we're a bit more concerned.
"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."
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," he said. "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.
"As a consequence, analysts' expectations are set at conservative levels so we would expect the results to be OK."
Frequently Asked Questions about this Article…
Analysts expect a generally benign profit reporting season: many companies are forecast to simply meet expectations rather than surprise. Given tough global conditions, investors are looking for firms to hit guidance rather than deliver big upside, so there should be few large negative surprises overall.
Expectations are more cautious after the past two years, when forecasts started optimistic (around 10% underlying profit growth) but ended up at no growth. Coupled with difficult global economic conditions, investors and analysts now set more conservative profit forecasts.
Meeting expectations is likely to satisfy the market and prevent big share‑price falls. If companies report better‑than‑expected profits, that could work in their favour and lead to positive market reactions, since current investor expectations are relatively conservative.
Fund managers have singled out the resources sector — particularly local miners — as an area that could still surprise with profit downgrades, because rising costs and currency effects are weighing on margins even as commodity prices have fallen.
Australia avoided unconventional monetary policy, attracting capital inflows that have kept the Australian dollar relatively strong. That strong currency has prevented local miners from receiving the usual cost relief when commodity prices fall, squeezing their profitability.
The outlook for industrial companies is described as cloudy but stabilising. Conditions have steadied over the past six months, the currency has been stable, and lower interest rates provide some support — so the downgrade cycle for industrials appears to be abating.
Balance sheet strength matters a lot. Many companies have solid balance sheets and don’t need to raise capital, which reduces the chance of negative surprises. Strong balance sheets give companies room to consolidate earnings and plan longer‑term growth.
Watch whether companies meet or beat profit expectations, any profit downgrades (especially in the resources sector), management commentary on costs versus commodity prices, balance sheet strength, and forward guidance about planning for future growth — these are the factors likely to matter most this season.
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