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Torquing points

The events of last week serve to demonstrate just how fragile this market is likely to remain.

Bombings in India, an escalation of tension in the Middle East – little wonder equities wobbled worldwide. Aside from anything else, the price of oil and other commodities started to climb again. Add to that some indifferent economic data, as well as the start of the second-quarter reporting season in the US, and you have enough material to worry investors who might have been treating the dip as a buying opportunity.

There will be plenty more for market watchers to get their teeth into. For example, this is an important week in the company results’ calendar. Seldom will the numbers be examined as closely as on this occasion. Analysts will be looking for any evidence that the monetary tightening presently taking place all round the world is leading to a slowdown in profit growth.

Already we are gaining a feel for the strength of corporate America and there have been disappointments. But it is the total picture that will need to be assessed. It is worth looking at what previous quarterly figures tell us. In a typical quarter, 60 per cent of companies beat market estimates, 20 per cent match them and 20 per cent fail to match up to expectations. When we look at these figures, we have a starting point for judging whether this is a good, bad or indifferent results season.

Consensus figures suggest that overall earnings’ growth should come out at an average of around 12.3 per cent but this figure is distorted by the fact that the energy sector is expected to deliver strong growth in profits and earnings per share. If the energy sector is taken out of the equation, then market earnings’ growth would come out at a more reasonable estimate of 9.6 per cent.

But the most important information will be conveyed in the statements accompanying these numbers. Analysts will be keen to learn whether companies are yet seeing real pressure on margins as higher energy and fuel costs, rising wages and the increase in the price of a number of other commodities start to push up costs. These factors have been present for a while but their impact has been offset by higher productivity. Certainly, we have seen a rise in the number of downward revisions of likely earnings in recent months and not just in the US. Globally, the upgrade-to-downgrade ratio has fallen below 50 per cent, meaning the market expects more companies to come in with profits below recent expectations than to exceed them.

Back home, we have to wait a little longer for the half-year results season to get into full swing. We have seen a number of trading updates recently, often as a consequence of an annual general meeting taking place. AGMs are not the source of new information on how a company is progressing that they once were, given the need to maintain a level playing field on price-sensitive information, but often the opportunity is taken to release a statement. Marks & Spencer took just such an opportunity last week,and the uplift in sales was well received. But even good news from a company is unlikely to be sufficient to prevent shares succumbing to market concerns when the bigger picture turns more cloudy.

The rise in the price of oil, metals and other commodities has done little to help markets build on the confidence gained from an apparently softer tone from the Fed. Rising inflation remains on the agenda. Ben Bernanke is determined to demonstrate he is capable of meeting the challenge head on, so higher prices could be accompanied by dearer money soon. Volatility is likely to remain a factor in markets for some time.

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Willis joins Whitechurch

Ben Willis has joined Whitechurch Securities as investment manager and head of research. He previously worked for six years at Chartwell Investment Management.

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