Second half of 2012 to be weaker
Firms’ earnings now less certain in absence of Asian recovery
As we move into the reporting season for the first half of 2012, many analysts are expecting to see weaker growth in companies’ revenues, but some resilience in their earnings. This is because while the global economy has slowed and volumes fallen, energy and commodity prices have also diminished thanks to less demand and a glut of shale gas in the US.
So far the results season has not deviated from expectations, although prospects for the second half appear weaker. Visibility of future earnings has also decreased, while the much-anticipated revival in the Asian economies such as China and India has yet to materialise.
In spite of this, we have seen the luxury goods sector holding up pretty well outside the West as demand for these products continues to develop, especially in Brazil. Companies benefiting from this trend include Swatch, L’Oréal and LVMH, and we have some exposure to the sector. Agrochemicals are also in relatively good shape, with companies such as Syngenta producing robust results. In technology, companies that sell directly to consumers such as Nokia and Logitech have suffered as demand has remained feeble and some have issued profit warnings. However, those companies that sell business to business have fared better. Software firm SAP recently became the largest corporation by market capitalisation on the German stock market. It moved ahead of engineering giant Siemens, which employs some 360,000 people as opposed to just 55,000 employed by SAP, according to the firms concerned.
Aerospace is another sector demonstrating positive trends. Companies such as Boeing have strong balance sheets and big order backlogs driven by growing demand, especially from emerging markets. These backlogs give them good earnings visibility and benefits supplier companies such as Zodiac, in which we have a holding and which has produced solid numbers in the first part of 2012.
Sectors that have done less well and about which we are more cautious include those that have seen companies retrenching. Telefónica of Spain, for example, could have to sell some of its prime assets in Latin America to shore up its finances as its home market remains weak. The company has suspended its dividend, which was the main reason for owning it in the past. Its share price fell by as much as 30 per cent in the first half of the year, before rebounding to end the six months to June 30 down 22 per cent, according to Bloomberg.
Another sector we believe could struggle is the utility sector, which is exposed to political intervention such as higher taxation and the withdrawal of subsidies as austerity measures begin to bite. Banks too are in a period of retrenchment as regulation on them increases in the wake of the financial crisis and pressure on them grows to reduce their indebtedness and raise their capital buffers. These stocks may appear cheap, but we currently see few reasons to own them.