In the next couple of weeks, investors will see real evidence of the fact that the Australian corporate earnings drought has broken. After two years of falling profits, they are now expected to rise about 6 to 7 per cent. For this significant turnaround we need have only one source for gratitude: China.
This is a China-led Australian earnings recovery based on increased prices it is paying for a number of our mineral resources, most specifically coal and iron ore.
Thus the real gains in earnings will come from resource companies such as BHP Billiton, Rio Tinto and Fortescue, whose earnings in the previous couple of years had fallen off a cliff and taken the aggregate Australian market profits with them.
This year will see these giant mining companies regain hero status. This, combined with the so-called Trump bump, has been a major factor in the strength of the Australian sharemarket over the past couple of months.
That’s the good news. The bad news is that the remainder of Australian companies – in particular industrials – won’t experience much of a profit bump. Yet they have also experienced sharemarket gains, the justification for which may now be in question.
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