It was yet another of those ridiculous directives from Aunty EU that we have to thank for the quite ridiculous spectacle of so many corporates reporting half year results on what many now call ‘Super Thursday’. OK, you are right, they didn’t all have to rush everything out today as the EU Transparency Directive of 2007 would still allow them to report tomorrow or even on Tuesday (the 31st August) to stay within rules that state half-year results must be reported within two months of the actual period end. However, unless the results to be announced really are bad, safe to say that no self respecting company worth its salt would choose POETS day to announce results. Why? Simply that market attention tends to be far less on a Friday and there are fewer participants around. Indeed, sales of Saturday newspapers that would carry detail of the results to a much wider audience than RNS and Bloomberg are also significantly less than on weekdays. True, for the majority of EU countries there are still three more working days of August left after today although for the UK given that Monday is what we call a Bank Holiday there is only two working days left. Gone are the days when companies could slip results out after the market closed and after the newspapers had gone to bed. Gone are the days when a company with something to hide would slip results out on say Boxing Day when no-one was around. Indeed, gone are the days when a company of sometimes decent size might hold an AGM late on the morning of Christmas Eve in the hope of ensuring not many shareholders would bother to turn up!
So it is that led by Diageo in the UK, Netherlands based Royal Ahold and both Accor and Credit Agricole in France countless dozens of companies right across the EU have chosen to report results today. And how were the first half results of this bunch? Pretty good overall except Diageo which was deemed to have missed analyst targets on the back of sluggish sales in the EU. Still, to be fair the company had warned that this would be a year of two halves in terms of performance. As to the others mentioned above it seems that without exception second quarter and half year results for all three may be termed as pretty damned good! Is this as good as it gets though? Not quite as it seems that recovery based strong performance seen from more than 75% of companies that have so far reported first-half results has been generally signalled to continue through the second half of the year as well. However, one notes the increasingly cautious stance taken by a reasonable sized chunk of companies as they provide thoughts about 2011 performance.
Many are justifiably worried about revenue potential and that there is not that much more cost and waste to be taken out. Nevertheless, first-half announced dividend increases and that are often seen as providing an alternative outlook have been pretty good and while plenty of economists and commentators are happy to talk things down warning on chances for double-dips and the like there are as yet few additional signs that the corporate sector is battening down the hatches preparing for the year ahead being quite as bad as some others wish to talk. We will see and most likely both views are right. Our view whilst far from being neutral is that for the majority of manufacturing companies (unless they happen to be late cycle performers) and service companies revenue growth in 2011 will be far more difficult achieve, margins are far more likely to be squeezed and that at best, we should better look to corporate profits being only marginally ahead or flat.
For all that there is ample good news across the corporate sectors. For instance whilst companies are far from being flushed with cash unless they might have gone a bit too heavy paying over the top on acquisitions prior to 2009 most it seems have managed to cut debt to the point of being regarded as being pretty well financed. OK, so there are always exceptions to the rule but the point is that leaner and fitter as they certainly should mean that the majority of larger companies can go into any period of flatness and difficulty next year probably better equipped to cope than at any time over the past thirty years!
Such views are supported by the fact that whilst very few companies are taking on new staff few are actually shedding jobs right now. Of course that doesn’t mean that they won’t soon be shedding if things get even worse than we ourselves project but while there are clear signs of life is getting tougher in the corporate sector no one is saying yet that it is time to panic. None of this is to suggest that the wider economic outlook for the UK, the US or Eurozone in 2011 looks particularly good. As I said yesterday, markets are probably right to fear that we may not yet have seen any end to the sovereign debt crisis in Europe although here and now I will say that S&P choosing to downgrade Ireland yesterday had all the makings of a hugely damaging publicity stunt! Sure genuine worries overhang Greece and Portugal is after all only just clinging on by the skin of its teeth. Spain just like Ireland in my view looks to be headed in the right direction in terms of addressing its deficit albeit that this is no time for investors to ignore remaining risks. Meanwhile bond spreads have markedly widened of late and the flight to seeming quality of German, French and UK bonds has by virtue of falling yields been very marked. There is then little doubt that although it is easy to exaggerate market concerns are both justified and genuine. Again as I implied yesterday that does not mean that there isn’t considerable opportunity available in the equity market for the discerning investor and one that is not wholly against risk. On top of this M&A activity has been truly exceptionally so far this year albeit to a degree unexpected and pundits of this speciality tell us that there is more to come. Given that there appears no shortage of available cash available to boards of companies that can not just prove the point that what they seek to buy will provide suitable growth enhancement opportunity but also that they are not paying a too heady price I generally agree that we will see enhanced levels of international M&A over the next year.
So there we are – the outlook isn’t good and yet whilst we are not very far outside it we are yet in the camp that anticipates a double dip. As to the flight to safety we are seeing in government bonds right now, it is hard to argue that it is not justified but then, it is also hard to argue in the same breath that it is also probably fickle meaning that it may quickly reverse. As to equities………undervalued as they seemingly are right now we take the view that there could well be another dip yet meaning it may be best to hold fire until at the very least the US government along with both the Fed and no doubt the Bank of England announce more stimulus measures in an attempt to head off deflation and stagnation.
