Signs point to a bumper year for the big mining stocks
A role reversal is shaping in the year ahead, with analysts tipping the big miners to fuel a strong bounce in market earnings, and growth among the top banks to ease.
Although this reporting season delivered another year of flat earnings, Deutsche Bank strategist Tim Baker is forecasting growth in the mid-teens during 2013-14.
Resource stocks - with some help from industrials - were expected to lead the recovery as commodity prices and growth in China "perked up", Mr Baker said. The big banks, he said, would be hindered by a slowing domestic economy.
But the prediction is far from a sure bet. While analysts generally agree that earnings will rise
among the miners and financials will be steady, the market remains volatile, particularly about exchange rates and the Syrian conflict.
Nevertheless, the initial indicators are positive.
Mr Baker said commodity prices, down 16 per cent in
2012-13 compared with the previous year, were recovering. For example, iron ore had clawed back its losses after it fell sharply in the three months to June.
Economic data from China in past weeks had signalled a recovery in our biggest market after a weak second quarter this year. And there was also a softening Australian dollar.
"The recent data suggests China has stopped slowing, which should help underpin commodity prices," Mr Baker said. "Also, production is trending higher across the sector."
He said the resource companies, which posted disappointing results this earnings season - BHP reported $US11.8 billion worth of underlying earnings, well below the $US12.6 billion analysts were expecting - were well placed to benefit from these factors, having implemented a range of cost-cutting programs and stepped up production.
"All that said, net earnings downgrades continue, so current growth forecasts are likely to be cut further," he said. "But, importantly, the pace of downgrades has been mild, not heavy, in the past few months. And mild downgrades have historically been enough to get solid earnings growth."
The outlook for the big banks, which generated strong earnings this season, was less rosy, Mr Baker said. Bad-debt levels, a rise in unemployment and credit growth increasing at 3 to 4 per cent would hinder earnings.
St George Bank chief economist Besa Deda said the financial sector was feeling the effects of a sluggish economy, which grew by just 0.6 per cent, seasonally adjusted, in the three months to June. "We are stuck in that pattern of below-trend growth," Ms Deda said.
"The economy is struggling with this transition that involves that move away by being driven by the mining investment sector to one that is being driven by non-mining.
"And while we go through that transition and while it remains not a very convincing or smooth transition, then I think financial institutions will be subject to that softer credit environment."
But like Mr Baker, Ms Deda expects the earnings of the big miners to improve.
"The miners have also made a lot of effort to repair their balance sheets in recent years. I think that is correct that earnings will improve for the miners, given that kick is now coming through on the volumes side."
But there were still many variables that could potentially affect the bottom lines of our resource companies.
"With geopolitical risks that are transpiring, there's also resource nationalism that has come to the fore, there is cost inflation, currency volatility - they are all having to deal with those sorts of risks, and that does feed through to earnings," she said.