July 22, 2012 / 2:33 PM / 6 years ago

BAY STREET-TSX faces tough results season; global slowdown bites

* TSX 60 Q2 profits seen down 0.2 pct pct y/y
    * Most growth seen in health care, industrials, financials
    * Tech, utilities, energy, consumer staples seen lagging
    * For 2012, TSX 60 earnings growth expected at 1 pct

    By Jennifer Kwan and Jon Cook
    TORONTO, July 22 (Reuters) - Canada's stock market has
lagged Wall Street most of the year, and investors can expect
more of the same as the country's biggest companies start
reporting second-quarter financial results next week.
     The earnings season is sure to highlight the scenario that
has held Canadian stocks down for months. A limp economic
outlook is pulling down commodity prices and cutting into
profits at the energy and mining companies that dominate the
country's equity markets.
     Next week will bring reports from such resource
heavyweights as Suncor Energy, Barrick Gold and
Teck Resources, as well as Canadian National Railway
, which generates revenue by hauling commodities.
     Overall, analysts are not expecting much. Companies whose
shares comprise the blue-chip S&P/TSX 60 index will
report an average quarterly earnings decline of 0.2 percent from
a year earlier, according to Thomson Reuters StarMine
SmartEstimates. This compares with the earnings growth of 0.7
percent that StarMine had forecast ahead of first-quarter
    "It doesn't take a genius to know that oil was $100 in the
first quarter and it was $85 in the second quarter, so it's not
going to be as good," said Barry Schwartz, portfolio manager at
Baskin Financial Services. "The market knows that the commodity
names are going to be lousy."
    For better or worse, the Canadian market often marches in
lock step with commodity prices. That's not surprising given the
plethora of energy and mining companies trading on the Toronto
Stock Exchange or the small-capitalization TSX Venture Exchange.
Indeed, resources account for more than 40 percent of the value
of the Toronto exchange's benchmark S&P/TSX composite index
    Commodity prices have weakened along with the growth outlook
for major economies such as United States and China, while
Europe's debt crisis dims the outlook worldwide.
     "It's a zero to low-growth environment. It'll be a very,
very rough patch for Canadian earnings," said Kien Lim,
associate equity strategist at RBC Capital Markets.
    The linkage was obvious in May and June when political
uncertainty in Greece flared over austerity measures imposed on
the debt-strapped country. During that time, the Thomson
Reuters-Jefferies CRB Index, a benchmark for commodity
prices, was down by nearly a third from the highs of 2011.
    With its heavy commodity exposure, the Canadian market has
fallen off the pace set by Wall Street this year. The S&P 500
index has risen 8 percent, while the Toronto benchmark index has
dropped 3 percent.
    The first wave of S&P 500 second-quarter results suggests
that Bay Street is unlikely to catch up anytime soon. So far on
Wall Street, about 72 percent of the companies reporting have
exceeded expectations, according to StarMine data. 
    In Canada, only 5 percent of companies on the TSX 60 have
reported so far, so it's too early to compare. Still, optimism
is in short supply north of the border going into the first big
    Energy is one of the softest spots. Share prices in the
sector have fallen nearly 10 percent this year as the price of
oil plummeted from a peak above $110 a barrel in the
first quarter to under $80 in June. 
    Not surprisingly, energy sector profits are forecast to fall
7.1 percent.
    The strongest profit growth on the TSX 60 is expected to
come from health care, traditionally viewed as a defensive
sector. Solid results are also expected from industrial,
financial and consumer discretionary companies. Technology,
utilities, consumer staple and telecom results are viewed as
likely laggards, according to StarMine.
    "This earnings season is going to be rather lackluster. I
think the focus is not going to be so much on earnings this
season, rather, it's going to be on the outlook," said Jennifer
Dowty, portfolio manager at Manulife Asset Management.
    The major hope for Canadian companies and the investors who
hold them is that the U.S. Federal Reserve and other major
central banks move quickly to jolt economies back to health.
     Chinese efforts to reverse a growth slowdown in Asia's
biggest economy could also give the Canadian market a lift
before the end of the year, said Stephen Lingard, managing
director at Franklin Templeton Multi-Asset Strategies.
    "There is no hard landing in China, and ultimately that will
factor and feature in the third and fourth quarters of this
year," he said. 
    Analysts said one of the few positives about the
second-quarter is that Canadian investors have already priced in
much of the bad news, leaving the potential for surprise gains.
    "The market is set up for horrendous earnings and if we come
somewhere above that level it's going to be taken as good news,"
said Baskin's Schwartz.
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