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Rio Tinto may have kicked profit season off with a bang last week, with a 33 per cent increase in half-year earnings to $6 billion, but it’s a result that won’t be indicative of the wider market.
The stock market has risen about 9 per cent in the past 12 months.
But in an economy with stagnant wages growth and falling property prices, which impacts on spending, many companies are feeling the pinch.
“The fact is that, domestically, earnings are probably a little bit subdued,” Bell Direct share market analyst Julia Lee said.
“In fact, if you take out the resources sector, for the Australian share market, earnings are only going to grow by around 2 per cent.”
One reason for that is the big banks, which are the biggest sector of the market.
The Commonwealth Bank reports on Wednesday, the first result under new boss Matt Comyn, and the first since its $700 million fine for breaching money-laundering laws.
“We’ve got rising funding costs in the US,” Eleanor Creagh from Saxo Capital Markets explained.
“We’ve also got slowing credit growth, falling property prices and heightened regulation, which will drag on earnings for the banking sector in particular.”
Miners and other exporters to lead profit growth
With commodity prices remaining high, Australia’s biggest company BHP is expected to mirror last week’s bumper profit from Rio Tinto.
Companies in other sectors that are also reliant on China are likewise tipped to do well.
“Among them will be Treasury Wines, then there’s the makers of baby formula Bellamys, and A2 Milk, which is a New Zealand company incidentally but listed here,” Citi Research head of equities Tony Brennan said.
“They’d be two areas where individual stocks stand out.”
Then there’s the United States, where strong economic growth combined with the weaker Australian dollar should help Aussie companies who operate in the US.
“The fiscal stimulus that was introduced late last year has really led the US economy to be on a sugar rush at the moment, so stocks like Aristocrat, Boral, Worley Parsons, they will all be poised to benefit from strong US-led growth,” Ms Creagh added.
As should companies including Cochlear, CSL and ResMed, which have all seen their share prices rise strongly in the last 12 months.
But with that comes pressure to deliver, as the US-listed Facebook found out two weeks ago when its shares plunged 20 per cent following a profit result that disappointed.
“We’re seeing a lot of very expensive stocks on the ASX at the moment, with the likes of Cochlear, with the likes of Domino’s Pizza, and a few of the tech stocks, such as NEXTDC,” according to Ms Creagh.
Telstra remains on dividend watch
As always, dividends will be a key focus of profit season as investors continue to search for good returns in a low-interest-rate environment.
Rio Tinto is showering its investors with cash, but it’s Telstra that could attract most attention.
As one of Australia’s most widely held stocks, small investors in particular rely on its dividend, which has already been slashed by more than 30 per cent to 22 cents a share.
Telstra could announce more pain to come.
“I think we’ll see Telstra’s dividend cut to 16 cents,” Bell Direct’s Julia Lee predicted.
“I think the bigger question is, ‘Where is the earnings growth going to come from?’
“Because if we continue to see earnings coming under pressure, then we could see that dividend payment continue to decline in coming years.”
Also under pressure are retailers reliant on the now-falling housing market, such as Harvey Norman, JB Hi-Fi and Nick Scali.
Perennial underperformer AMP may deliver another nasty surprise in an estimate of the cost of the class actions it is facing over the fees-for-no-service scandal.
Topics: stockmarket, company-news, business-economics-and-finance, australia
