The imminent reporting season for listed companies got under way this week, with Telecom the first major company to report, yesterday. ODT Business Reporter Simon Hartley runs the rule over the year ahead and company expectation with Forsyth Barr broker Suzanne Kinnaird and Craigs Investment Partners broker Peter McIntyre.
Volatility in equities markets remains bubbling just below the surface.
A week ago, world sharemarkets shuddered following the unexpected bad news on unemployment and jobs from the US, compounded by further sovereign debt concerns with many European countries - with bourses jarring to a halt and losing 1.5% to 3%, billions of dollars, in value overnight.
This was reflected in weak trading earlier this week on the New Zealand exchange as caution prevailed for many investors.
Broking houses Forsyth Barr and Craigs Investment Partners are predicting more headwinds for companies in general this year and a cautious approach by companies for the reporting season, which started with Telecom reporting yesterday.
Craigs Investment Partners broker Peter McIntyre expected the forthcoming results to confirm a stabilisation in companies' operating conditions and Craigs' was not expecting major earnings surprises.
"We're focused as much on the forward indicators as we are on the historical result.
"Management guidance will invariably remain cautious, but we expect comments to incorporate a more positive tone about improvements in the operating outlook, which is likely to underpin share price performances," he said.
However, with the New Zealand dollar trading above US70c for much of January, Mr McIntyre cautioned the kiwi's strength could obscure stronger, underlying operating performances for some companies, while conversely the weak kiwi against the Australian would benefit companies with Australian exposure.
Forsyth Barr broker Suzanne Kinnaird's outlook for the year ahead is that the global economy will take some time to recover and faces further headwinds along the way, meaning further volatility around a broadly sideways trend for markets during the next year.
"The medium-term outlook for equities is positive as we move from an earnings downgrade cycle to an upgrade cycle. Global markets have generally rebounded to levels that historically would suggest a sideways bias for the first part of 2010, as there remains ongoing near-term earnings risk."
Because of that risk, she picked that the stocks of the defensive sector, such as energy companies, which were left behind during the risk rally in 2009, were likely to attract additional investment funds in the year ahead.
"During this period, interest in mergers and acquisitions activity is expected to gain traction ahead of the next economic growth phase," she said.
She said that "on average" the statements accompanying companies reporting profit should have "at least a mildly optimistic view of the road ahead and provide a sign that the worst of the economic fallout is well and truly behind us".
While companies delivering positive surprises may be rewarded with share price re-rating, she cautioned that any unexpectedly poor results "would be treated harshly".
In looking for guidance of economic activity, Mr McIntyre said investors would closely scrutinise Fletcher Building, Freightways, Mainfreight, The Warehouse and Air New Zealand, as the best barometers of economic activity.
"We expect companies to report good growth in the second half of this year [Jan-June 2010] as they cycle a particularly weak comparative period and exhibit stronger operating leverage and margin improvement following a sustained period of cost-cutting through the recession," he said.
Mr McIntyre's top five picks for the year ahead are. -Contact Energy, offers good value appeal to investors, being a blue chip asset base, with growth from renewable energy and recovery coming from retail client base.
Fletcher Building, which had restructured during the past year, should see any top line revenue growth flow directly through to its bottom line, Mr McIntyre said.
Sky City had refocused on its core business and operations improving while Delegats was seen as an astute operator handling premium brands and with good growth prospects from the UK expected.
Mainfreight remained a quality cyclical share with a strong brand and it was expected its earnings should pick up as GDP growth recovered, Mr McIntyre said.
Ms Kinnaird said Auckland International Airport had solid defensive characteristics, plus maintained operating leverage to underpin recovery in passenger volumes.
Contact Energy was a utility provider with good attributes and its share price was at a big discount to valuation, having underperformed significantly in 2009, she said.
PGG Wrightson was worth considering backing for its potential following its capital restructuring and, like Contact, last year's massive underperformance.
Delegats was an undervalued genuine growth company which would be a big winner as the New Zealand dollar depreciated and the international wine market improved, Ms Kinnaird said.
Guinness Peat Group now had limited down side, with potential for a capital return or wind-up in prospect, and it would also benefit from a fall in the kiwi.
"[This] should be the year GPG finally performs," Ms Kinnaird said.
She said fundamental factors such as a company's's earnings certainty would count for more with a market trading around fair value.
"While the first stage of the recovery lifted many stocks, we believe the market is becoming more discerning about which stocks it will support during the earnings recovery phase," she said.
She said a combination of dependable earnings, sound management, low debt and healthy growth prospects was important for investors to consider.
"In most cases, we would see these forming the core of a share portfolio in the year ahead," she said, picking AGL Energy, ANZ, CFS Retail, IAG, Lend Lease, Orica, SAI Global, Sonic Healthcare and Suncorp.
For BNZ chief economist Craig Ebert, the glow of trading in the New Year has already dimmed on global financial markets, having started well with a slew of "better-than-expected" manufacturing data which saw both equities and investors' risk-appetite return.
"The global manufacturing data helped cement the notion the global outlook for 2010 was clearly brighter than 2009," he said in his monthly financial markets wrap for January.
However, that positive glow was dampened after investors were "spooked" by China curbing bank lending to quell overheating elements within its own economy.
That problem was further compounded by concerns about sovereign solvency, such as Greece escalating fiscal deficit to 13% of GDP, Spain, other European countries and Portugal, whose rating faces being downgraded.
"Reflecting these developments, [investor] risk-appetite faded over the second half of January," Mr Ebert said.
"All up, January was a stark reminder just how sensitive markets are to any hints of stimulus withdrawal," Mr Ebert said.
The strength of the New Zealand dollar appears set to keep exporters frustrated, with Mr Ebert saying any dips below US70c were expected to be "short-lived".
However, Mr McIntyre believed the US65c range could be tested within six months, based onvolatile equity markets, the sovereign debt concerns and China credit controls.
"There is a realisation no-one really knows what will happen or how it will happen, with respect to taking away financial stimulus," he said.
Ms Kinnaird said while some commentators were questioning the sustainability of the current recovery, she believed a number of important conditions for the next phase of growth were in place.
Credit markets had stabilised, emerging Asia was leading the way in the recovery, which was helpful for Australia, and industrial production was solid.
She noted that US housing was bottoming out, labour markets were turning and core inflation remained subdued, despite some impact of higher commodity prices.
• Both brokers' financial disclosure documents are available on request.
Reporting dates
February 15: Freightways. 16: NZ Farming Systems Uruguay, Skycity.
17: Fletcher Building, ING Medical Properties.
18: Skellerup, Mainfreight, Michael Hill International, Opus Consulting, Team Talk. 19: Cavalier.
22: Property for Industry.
23: Contact Energy, Pike River Coal, Wellington Drive Tech.
24: NZ Oil & Gas, Pumpkin Patch, Tourism Holdings, Turners and Growers.
25: Delegats, Ebos Group, Hellaby Holdings, Nuplex, PGG Wrightson, Port of Tauranga, Cavotec.
26: Auckland International Airport, Air NZ, NZ Windfarms, Pyne Gould Corp, Rubicon, Vector, Guinness Peat Group.
