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The outstanding late week trading update from the ANZ Bank and another robust result from Woolworths, capped off a decidedly better than expected reporting season.

State Equity Matters - 1 March 2010

Mixed set of results in final week of reporting season Domestic economy quietly gathering momentum GDP for December quarter out this week

By Michael Heffernan

The outstanding late week trading update from the ANZ Bank and another robust result from Woolworths, capped off a decidedly better than expected reporting season. Arguably It was one of the most impressive in recent times given the continuing uncertainty in major world markets and economies.

But focussing on the last week itself, the deluge of reports constituted a mixed bag with good, bad and ordinary results raining down on investors like confetti from the market's sky.

The result was that the ASX200 Index has almost been becalmed over the five trading days and finished with a wafer thin rise of 2 points or 0.06% over the week.

However significantly, and as was commented last week, the level of the index of around 4650 points is about the same as it was back in September last year when the index was surging upwards.

With the general trend of reports in the recent past in most cases exceeding expectations, one could form a considered view that for sound stocks with reasonable profit prospects, the current easing in share prices may well represent opportunities for medium term investors.

Locally on the economic front, which of course provides the structural underpinning for future market behaviour, indications are that activity is quietly gathering momentum, but at a lack lustre pace. For instance figures on sales of motor vehicles (a partial indicator of demand) showed a decline during the month of January -a result which was not unexpected as it was the first month following the removal of the investment allowance tax benefit for the purchase of motor vehicles.

Data on private sector investment continues to be generally buoyant with total capital spending on plant and equipment in particular up strongly in the December quarter, albeit at a lower level than a year ago. Furthermore expectations for investment over the remainder of 2009/10 and for 2010/11 are firming up for a strong rebound over the next 18 months.

On the wage cost front, average weekly earnings showed a rise in the year to last November of a relatively large 5.6%, with public sector wages eclipsing that for the private sector, with annual growth of 6.2% compared with 5.7%.

While the above data only represents what can be called partial indications of overall economic activity, they do not give the Reserve Bank unequivocal support for a movement upwards in interest rates in their meeting on Tuesday.

However as the previous increase was last December, and as the Bank has indicated that it would like to see interest rates increase towards a more neutral level, (i.e. about 4.5% by the end of this year), it would seem more likely than not that the Bank will increase rates on Tuesday by 0.25%. For the future it is unlikely we will see any further move for a few months now, given that the Bank has indicated that they will move rates on a gradual basis, i.e. "not at every meeting".

On the external front, the testimony by the US Federal Reserve Board (FED) Chairman Ben Bernanke to the House Financial Services Committee that "subdued inflation trends, and stable expectations- are likely to warrant exceptionally low levels of the federal funds rate for an extended period" did give some joy to the markets, which have been worrying that the FED may move to lift rates sooner rather than later.

At the corporate level and as already indicated, this week's reporting season was a mixed bag. However some outstanding results were delivered by Carsales.com, Transfield Services, Iress Technology, REA Group, Kingsgate Consolidated, Asciano, and to a lesser degree Woolwoths and United Group.

On the other hand three major companies which disappointed the market, as measured by subsequent share price movements were Toll Holdings, QBE and Suncorp- which recorded profits, albeit that the results were less that expected.

But the biggest disappointment from a second line company was that of Gunns Limited. This company delivered a profit decline of 94% in the half year to December compared with the corresponding period of the previous year and its share price dropped by 30% over the week.

However it is significant that the outlook statement of many companies provided expectations of continuing profit growth, or at least achievement of profit in the coming year at levels equivalent of that of last year. Words such as "positive outlook", "going from strength to strength", "modest growth" and expressions of similar import, appeared frequently in the Outlook part of the reports.

With expectations that the Australian economy is likely to grow by 3% this year (which represents a tripling from the 1% growth of last year) it would not be surprise to see that the post June end year reporting season may again surprise many investors.

Looking ahead on the corporate front there is little in the way of company reports, with most attention now focusing on local and international economic news. More particularly the highlight will be the decision on interest rates by the Reserve Bank on Tuesday which will coincide with important partial indicators of demand in the form of building approvals and retail sales.

After strong growth over the last year, building approvals may have eased slightly in January while the retail sales for the same month can be expected to show a seasonally adjusted increase from the slight fall in January.

On Wednesday we will have the important Gross Domestic Product figures for the December quarter which may well show a modest quarterly increase of around 0.5%.

In the United States there are again very important lead indicators about how their economy is tracking, with the Institute of Supplied Management Manufacturing Index out on Tuesday, motor vehicle sales and the ABC Consumer Confidence Survey results on Wednesday, on Thursday the Institute of Supplied Management Non Manufacturing Index, while on Friday figures on productivity and factory orders are due out and perhaps most importantly of all on Saturday, figures on the unemployment rate in the United States will be available together with figures on average weekly earnings.

A reasonable expectation is that the unemployment rate in the US will continue to show sluggishness, and if the unemployment rate remains as it was last month at around 9.7% this would be a good result.

In conclusion the market is continuing to consolidate and the next major catalyst for growth will be the other three (non CBA) major banks which are due to report in 2 months time.

But to reiterate an earlier comment, the easing in overall share market prices over the recent past, does represent attractive value for investors with a medium term investment horizon.