October 16, 2011 / 2:42 PM / 6 years ago

Recession fears may catch up to Canada companies

5 Min Read

TORONTO (Reuters) - With fears of a global recession in the air, investors are getting anxious about what's ahead for Canada's biggest companies, many of which are tethered to the ups and downs of the world economy.

That means the outlooks offered by the nation's CEOs during the coming reporting season will assume even more importance that usual as investors are already counting on another round of robust results for the recently completed quarter.

But with expectations running so high, negative surprises are likely to sting, sending a clear signal that earnings growth will slow during the rest of the year and in 2012, say equity strategists and money managers.

"I don't think the big story right now is going to be Q3 earnings as much as a fixation on these big macro issues starting with Europe," said Garey Aitken, chief investment officer of Bissett Investment Management in Calgary, referring to the fallout from the euro zone's festering debt crisis.

"How that evolves will be much more of a significant driver of short-term equity returns in Canada."

Canada's third-quarter earnings season kicks off next week, on the heels of some distressing signals from the United States with profit misses and cautious words from Alcoa (AA.N), an industrial bellwether, and JPMorgan Chase & Co (JPM.N), a global financial powerhouse.

Among the blue-chip resource companies on the Toronto Stock Exchange's S&P/TSX 60 index .TSE60 that will report results over the next couple weeks are EnCana Corp (ECA.TO), Teck Resources TCKb.TO, Potash Corp (POT.TO) and Barrick Gold (ABX.TO).

Companies whose shares comprise the blue-chip TSX 60 index are expected to report average earnings growth of 28.0 percent from a year earlier, according to Thomson Reuters StarMine SmartEstimates. Fourth-quarter estimates call for 12.8 percent growth.

By comparison, Q3 earnings for companies on the U.S. Standard & Poor's 500 .SPX, a much broader index, are seen rising 13.3 percent.

"It's yesterday's news," said Gavin Graham, president of Graham Investment Strategy. "The worry is what the outlook is going to be."

Grim predictions of a deteriorating global economy and a worsening European debt crisis have sent stock markets tumbling since July, shaking the confidence of consumers and investors alike.

"Part of it is that we are talking ourselves into recession, or the outlook is sufficiently gloomy that people are being cautious, and as a result we're getting ourselves into this self-perpetuating spiral," Graham said.

Since its record high of 14,329.49 hit in March, the TSX composite index .GSPTSE has tumbled 15 percent and is down 10 percent from the end of 2010.

Investors Fixated on Macro

Favorable company earnings from the last quarter may do little to encourage investors, partly because the rough patch didn't really start until midway through it.

A Reuters poll conducted last month showed analysts expect the composite index to end 2011 at 12,200 for a loss of 9.2 percent this year, reversing gains of nearly 31 percent in 2009 and 14.4 percent last year.

This year, stock price gains have been led by defensive sectors such as telecoms, health care and consumer staples, while cyclical financial, material and energy shares have lagged far behind.

The TSX composite's slant toward banks and resources - which make up 80 percent of the index - is a blessing and curse. Canadian earnings in the third quarter are due to outperform due to strong results in those sectors as commodity prices and interest rate spreads have risen year over year.

But if the global growth picture is darkening, Canadian companies will soon start to underperform. Estimates for fourth-quarter earnings growth on the S&P come in at 13.3 percent, the same as the third quarter, which is slightly higher than predictions for the TSX, according to Thomson Reuters Proprietary Research.

"The deceleration of earnings might be a little sharper in Canada over the next coming quarters than we see in the United States," said Philip Petursson, managing director of portfolio advisory group at Manulife Asset Management. "That's on broad-based macroeconomic factors."

Estimates for 2011 earnings growth on the TSX are pegged at 22.7 percent, falling to 11.7 percent for 2012.

S&P earnings increases are seen at 17.9 percent and 12.2 percent respectively in the same periods.

Reporting by Claire Sibonney; Editing by Frank McGurty and Peter Galloway

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