Openings as major US firms report

The current United States reporting season could create further volatility, providing some opportunities to increase or establish positions in quality overseas companies, Craigs Investment Partners broker Chris Timms said yesterday.

This week, the first of the major names in the US report their quarterly earnings.

By the end of the week, about 15% of the Standard and Poor's 500 companies by market capitalisation would have reported.

''Over recent days we have seen some volatility in the market, first on the back of negative sentiment regarding further stimulus cuts by the United States Federal Reserve, followed by some positive sentiment on the back of retail data.''

Some of the recent volatility could also be attributed to investor caution ahead of earnings announcements, especially given the number of negative pre-announcements seen by corporates, Mr Timms said.

During the reporting season, Craigs expected many companies to continue to deliver a similar theme of solid earnings growth despite modest revenue growth.

While the 2013 performance in the US had seen some multiple earnings expansion, a discount to the long-run average still existed.

Valuations overseas remained more attractive, on a relative basis, than they did domestically.

''Coupled with our strong currency, which should ease over the medium term despite short-term strength, increases to global allocations should be considered,'' he said.

According to Reuters data, nearly 10 out of every 11 earnings pre-announcements for the current earnings season from S&P companies had had estimates revised lower.

However, macro data and earnings per share (EPS) trends suggested earnings should be healthy and showed EPS growth gaining further in 2014.

In the latest earnings season, expectations were for earnings growth of 8.3% and sales to fall by 1.5%, Mr Timms said.

While there had been negative revisions, only about 20% of the S&P 500 companies had come out with pre-announcements and the past four quarters had had the index push higher despite downward revisions to earnings forecasts in each quarter.

So far, 43 companies in the index had reported earnings. Estimates show more than 60% of them had beaten expectations at the sales level and a similar number had beaten them at the earnings level, he said.

''Given the small sample size so far, it is difficult to get a meaningful gauge of how remaining corporates will report.

"Strong revenue growth is likely to remain elusive for many companies while earnings should continue to improve through productivity gains, cost management and divestment of non-core assets.''

Many corporates had also supported EPS growth through share buy-backs which had been at the highest level since 2007, Mr Timms said.

With the high likelihood there would be further tapering throughout this year, there could be volatility and opportunities to pick up quality stock.

However, it was important to note further tapering was predicated on the continuation of improving economic data.

The caveat of solid underlying growth in the US economy in order for further stimulus should translate into revenue growth for corporates.

An improving economy would offset some of the potential volatility from further tapering as it would result in improving earnings for corporates.

Simply waiting for large swings as entry points in an environment of improving, and sustainable, underlying growth might prove difficult.

Any short-term dip should be seen as a buying opportunity, Mr Timms said.



This month

United Tech, Microsoft, Procter and Gamble, Apple, Caterpillar, Plum Creek Timber, AT&T, Facebook, Roche Holding, Google, 3M Co, Diageo, Exxon Mobile.

Next month

Toyota, BP, Syngenta, GlaxoSmithKline, Twitter, Vodafone, Statoil, SSE, Coca-Cola, Reckitt Benckiser, Nestle.


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