News on profits and China deter market

A SLUMP in company profits in the December quarter and news that China is expected to grow at a slower pace than expected this year sent the market a little lower yesterday.

By InvestSMART · 6 Mar 2012

By InvestSMART ·
6 Mar 2012

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A SLUMP in company profits in the December quarter and news that China is expected to grow at a slower pace than expected this year sent the market a little lower yesterday.

Overall it was a mixed but lacklustre session, with five of the 12 industry sectors losing ground.

Rio Tinto and BHP Billiton lost ground after Premier Wen Jiabao said China aimed to grow its economy by roughly 7.5 per cent this year, with inflation running at an annual rate of 4 per cent.

That figure, which came in below the big miners' assumption of 8 per cent growth, saw shares in Rio Tinto fall 84?, or 1.3 per cent, to $65.09, while BHP Billiton shed 30? to $35.39. Woodside Petroleum lost 27?, at $36.03.

The healthcare and utilities sectors performed best, with global healthcare company CSL gaining 13? to $33, and Sonic Health rising 13? to $11.78.

Market weakness was compounded by several companies going ex-dividend. They included QBE Insurance, which fell 3.3 per cent to $11.85, Brambles lost 1.4 per cent to $7.11, and Iluka gave up 2.4 per cent to $16.97.

The benchmark S&P/ASX 200 Index shed 16.7 points, or 0.39 per cent, to 4256.4.

With reporting season now over, investors turned their thoughts to the state of the economy, and today's Reserve Bank board meeting.

Data provided a mixed view of the economy and despite a rise in the number of job advertisements last month, investors took some value from the market.

According to the Bureau of Statistics, Australian companies made a combined gross profit of $269 billion in 2011, an increase of just 2.1 per cent over the year, after falling 6.5 per cent in the December quarter.

It was the second-worst performance for a calendar year in 17 years, since records began. The worst was 2009, at the height of the financial crisis, when profits fell 13.7 per cent.

A gauge of monthly inflation from TD Securities showed the annual rate had fallen from 2.2 per cent to 2 per cent, after rising by only 0.1 per cent last month.

Coupled with a 5.3-point decline in the Performance of Services Index, an index that tracks conditions in retail, financial and other services sectors, the news provided a spotty outlook of the health of the economy. That adds weight to the view of the majority of economists that the RBA will keep rates on hold.

An increase in newspaper and internet job advertisements provided some good news, with job ads growing 3.3 per cent last month, following a rise of 7.5 per cent in January, up 3.6 per cent on a year ago.

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Frequently Asked Questions about this Article…

Why did Australian miners like Rio Tinto and BHP Billiton fall after China’s growth update?

Shares in major miners fell after Premier Wen Jiabao said China aimed to grow about 7.5% this year, a figure below the roughly 8% growth assumption held by big miners. The market took that as weaker demand for resources, sending Rio Tinto down to about $65.09, BHP Billiton to around $35.39 and Woodside Petroleum to roughly $36.03.

How did the December quarter slump in company profits affect the ASX 200 and investors?

Australian companies’ gross profits fell 6.5% in the December quarter and totalled $269 billion for 2011, up just 2.1% for the year — the second‑worst annual performance in 17 years. That weak profit backdrop helped push the S&P/ASX 200 down 16.7 points (0.39%) to 4,256.4 and left investors focused on the wider economic picture and upcoming Reserve Bank board decisions.

Which sectors and stocks outperformed during the session and why should investors notice that?

Healthcare and utilities led the market that day, with global healthcare company CSL rising to about $33 and Sonic Health up to roughly $11.78. For everyday investors, sector outperformance highlights where demand held up despite an otherwise mixed market, and can point to defensive areas to consider when profits or resources demand is weak.

Why did stocks such as QBE, Brambles and Iluka fall on the day?

Those stocks went ex-dividend during the session. Shares typically adjust downward on the ex-dividend date to reflect the upcoming dividend payout, which contributed to QBE trading near $11.85, Brambles around $7.11 and Iluka near $16.97.

What do the ABS profit figures mean for everyday investors watching company earnings and dividends?

The ABS data — showing only a 2.1% rise in combined gross profits for 2011 after a December quarter decline — signals that corporate profit growth was weak. For investors, weaker profits can mean more cautious earnings outlooks and potential pressure on dividends and share prices, so it’s a reminder to assess earnings quality and sector exposure.

Given the mixed data, is the Reserve Bank of Australia (RBA) likely to change interest rates?

The article notes a spotty economic outlook — weak profit growth and softer services conditions, but rising job ads — and says the majority of economists expect the RBA to keep rates on hold. The mixed signals add weight to a cautious RBA stance rather than immediate tightening or easing.

What are the recent inflation and services sector trends investors should be aware of?

A TD Securities inflation gauge showed the annual rate eased from 2.2% to 2.0% after a small monthly rise of 0.1%. At the same time, the Performance of Services Index fell 5.3 points, indicating softer conditions in retail, financial and other services — together these figures point to a patchy near‑term economic outlook.

Are job advertisements improving, and what does that mean for the jobs market?

Yes — newspaper and internet job advertisements rose 3.3% last month after a 7.5% jump in January, and are up about 3.6% year‑on‑year. That improvement is a positive sign for labour demand and provided some encouraging economic news for investors amid otherwise mixed data.