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Healthy profits just a sideshow in day's turmoil

The reporting season has been obscured by the market ructions.

The reporting season has been obscured by the market ructions.

YESTERDAY'S wildly see-sawing stockmarket further obscured Australia's current reporting season, which is targeting a 14 per cent lift in profits on consensus forecasts.

Frenzied swings in the market, which yesterday lost $65 billion before roaring back in one of the biggest one-day swings in traders' memory, are relegating reasonably healthy corporate profits to sideshow status.

''What's going on in Australia doesn't really matter - it's all revolving around the US and Europe,'' UBS equity strategist David Cassidy said yesterday.

''The longer markets remain in panic mode, the chances of US and European recession rise by the day ? you have got a negative feedback loop between the markets and the economy.''

Sharemarket volatility promises to continue with rumours of major US hedge funds being forced to sell on margin calls and mutual funds forced to sell stocks to meet redemptions.

On the positive side, rumours circulated about possible US moves for a third round of quantitative easing and globally co-ordinated central bank action.

''Rumourtrage'' is a long way from old-fashioned judgments about fundamental values of companies based on their profits, with UBS showing Australian companies' prices falling to a (cheap-looking) ratio of 10-times earnings.

Indicative of the volatility, Cassidy is forecasting either a 20 per cent improvement in the S&P/ASX 200 if the US has a recession or a 10 per cent to 15 per cent fall if it doesn't have a recession.

Nevertheless, Cassidy is predicting 10 per cent profit growth across companies this reporting season, albeit falling to a more anaemic 3 per cent if resources are not included.

Ironically, the US is also experiencing a bumper profit season. In a report last week, Macquarie analyst Bryan Raymond found that about 80 per cent of the way through the S&P 500 reporting season, profits were

4.4 per cent ahead of expectations, with 144 materially exceeding forecasts and 47 materially missing forecasts.

Alva DeVoy, an equity strategist for RBS, said yesterday Australian companies were approaching the price-earnings ratios they reached at the depths of the financial crisis.

But this time Australian companies are not saddled by high levels of pre-crisis debt after $60 billion in capital raisings in 2008 and 2009.

''I guess our anchor is around Chinese growth. If the markets perceive the China growth trajectory is on track, we should see the resources and industrials perform well,'' she said.

RBS forecasts profits will lift 17.6 per cent this reporting season. But it has cut its December target for the S&P/ASX 200 from 5300 to 4750 based on the uncertain market.

Mike Mangan, a fund manager with 2MG Asset Management, agreed valuations were cheap, to a point.

''I would not be selling today. You look at the valuations there's a stack of stocks out there approaching 10 per cent yields,'' he said.

But he said the threat of global instability, shown by riots in London, threw up even greater challenges for politicians. And he said, if things deteriorated, bounces in the market would be a good opportunity to cash out.


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