LEX For a region whose business model – broadly speaking – relies on buying ever more expensive materials to sell goods to a slowing world, Asia’s earnings forecasts look surprisingly perky. As the earnings season kicks off, consensus forecasts are for just over 5.4 per cent growth this year and 16 per cent in 2009.
Certainly, Asia Inc looks in far better shape than its western counterparts. There have been few profit warnings and the financial sector – almost one-third of the MSCI Asia ex-Japan index – was relatively unscathed by global credit woes. To be fair, analysts have been trimming their expectations: numbers started this year above 11 per cent. But there are warning signs. Chinese state-owned enterprises generated aggregate pre-tax year-on-year growth of just 1.5 per cent in the first five months. Even stripping out oil refiners – which bear the cost of Beijing’s fuel subsidies – leaves the number well below 2007’s 30 per cent growth rate.
Much of the pain comes from margin contraction and reflects the region’s deteriorating terms of trade (the price of exports, relative to imports). So far this year commodity costs have risen 23 times faster than export prices, according to Citigroup. The bank calculates that earnings before interest and tax margins, at 12.1 per cent, have been falling since the start of the decade and now rank below the US, Europe and other global emerging markets. Borrowing costs, which are likely to rise further as the region’s central banks attempt to stem the surge in inflation, will make an ever bigger dent in the bottom line of big borrowers, among them the Indian companies making acquisitions overseas and Chinese real estate companies.
Of course, there is good and bad lurking within the consensus numbers, and markets – if not analysts – are already discounting earnings disappointments in some of the most egregious areas. Technology, a pillar of the Korean and Taiwanese stock markets, has been marked down alongside falling consumer electronic goods price tags. Expect more downgrades to follow.
