As profit reporting seasons go this one should be harmless enough, if only because Wall Street’s matters more.
Friday’s share sell-off is a case in point, which was blamed on disappointing profit results on Wall Street from several multinationals, even though going by the US reporting season so far they’ll be the exception.
But they matter nonetheless. As the much ignored Henry report commissioned by Kevin Rudd – remember him? – concluded “international capital markets set the cost of capital and value for Australian companies”.
In other words, we don’t control our own market, as most recently demonstrated by the South African takeover of David Jones. Even bond yields and mortgage rates are swayed most by foreign buying and lending.
By the way, globalisation was the reason for the Henry report’s scepticism about the virtues of dividend franking with its 30 per cent tax break so perhaps it’s best left undisturbed.
Anyway, we already have a good idea of the outlook for profits thanks to continuous disclosure, not that this rules out surprises.
Costs are down thanks to lower wages growth, low interest rates or, even better, lower debt and downsizing. Any surprises should be pleasant ones, with QBE always the exception proving the rule, especially when it comes to dividends.
It’s not as if companies need to hoard their profits because they have big expansion plans in mind either. There’s no sign of that, much to the chagrin of the Reserve Bank.
Besides, if they want to look after their ordinary, rather than their foreign, shareholders they should shovel out as much as they can in franking credits, which are about to be devalued by the cut, Senate permitting, in the company tax rate next financial year.
This is supposed to drop to 28.5 per cent, which would reduce every $1000 of franked dividends by $30.
But to be frank, franking doesn’t worry the foreign investors who drive this market.
The puzzle is that not much else is worrying them either. Markets have been unusually calm for ages and even on bad hair days like Friday there’s barely a blip. Not even the tinderboxes of Ukraine, Gaza or Syria seem to register.
They may as well all be on Valium, which in a way they are. When you can only get 0.2 per cent in interest, anything else has to look good. Heck, even government bonds look exciting. And if you can borrow at that rate the world is your oyster.
In euro areas rates are even negative – on deposits, not loans that is. Switzerland’s are 0 per cent; that’ll teach all those secret bank account holders but then they probably don’t care.
No wonder corporate executives overseas are buying back shares with this cheap money especially when, as BlackRock chief investment strategist Ewen Cameron Watt points out, a good part of their pay depends on benchmarks such as earnings growth or return on equity, which all look better on fewer issued shares. And fewer shares mean higher values.
Next come takeovers, the textbook sign of a bull market peaking.