THE SKEPTIC: Wait Until Next Year
27 Jan 08:00
By Howard Wheeldon
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--Any chance of the long dreamed turnaround in equities in
2003?
Well, with anticipation for economic growth so low and settlement of the Iraq
issue still looking a long way off, there seem to be all too few positive
influences for the markets to latch onto yet.
Indeed, with so little sign that business investment will start anytime soon,
one wonders how long before the Iraq situation gets used as the latest reason
for another round of 2003 forecast downgrades.
True, of the mix of U.S. companies to have reported fourth quarter earnings
so far, the split between those that have beaten expectations to those that
have underplayed their hand is roughly half and half.
And while talk of some further earnings recovery this year from virtually all
CEO's reporting so far presents a common theme, there's a distinct lack of
optimism that what may be termed real growth is likely to be evident in the
year ahead.
Put it another way if you like - no one is investing, so revenue is at best
flat and order books are not exactly buzzing with excitement right now.
It's not so easy, either, to jump on board consolidation trains to move
earnings ahead. Braving corporate merger markets while carrying high loads of
debt on lowly valued paper is hardly likely to go down well.
Eighteen months down the line it is perhaps too easy to forget that following
the tragic events of 9/11 and the dramatic performance turndown seen in the
fourth quarter of 2001, most companies had started 2002 with order books
already down significantly.
Adapting quickly to those depressed conditions meant most CEO's have already
spent the best part of two years stripping out inventory, shedding labor and
writing down overblown values of assets acquired in the previous boom.
True, all that has worked up to a point, and there is little reason why the
ongoing benefits of all this hard work shouldn't provide a little more in the
way of earnings recovery for some through 2003.
Leaving aside further impacts of Iraq, though, for all too many others the
current year is perhaps best seen as a year of respite. That means the hard
work is all but done and that all that's left is perhaps adjusting to fewer
orders, lower output levels and a new reality of what perhaps lies ahead - a
distinct lack of growth.
Recovery, after all, has a totally different meaning than growth and most
companies in Europe and the U.S. had already begun 2003 with order books at the
weakest point for years.
For real growth to occur, one needs business investment. And for that to
happen, one needs enough confidence that the effort and risk involved will be
duly rewarded with improved financial returns.
There's not much chance of seeing that, though, with so much fear around
right now and in a deflationary environment, too.
Best to anticipate that 2003 may well see another round of exceptional
charges similar to those that characterized reporting seasons of 2001 and to a
lesser extent, 2002.
More assets to be effectively abandoned or written down and more labor cuts
are likely to be in prospect, too.
This probably means that debt as a percentage to equity will rise somewhat,
too, and lead to further credit rating reappraisals.
If a scenario such as this is to be believed, then it could well be that
industrial manufacturers might fare worst of all in 2003 as the late cycle
nature of much of their business and the remaining capital spending boom froth
finally works its way through.
Weakening demand, then, combined with deflationary pressures, do certainly
suggest another bad year ahead, but perhaps just not quite as bad as those that
have just gone before.
Arguably, though, much of the current fear could already be priced into
equities, suggesting the majority of already near efficient companies could
just mark time through the rest of the year and perhaps look for better things
next year.
For investors, then, 2003 might well be the trickiest year of the last three.
Few really believe that the current year will provide much in the way of
reasoning for improved confidence but if the real bottom to markets is found
some time soon, then those same pessimists could soon have a decent case to
argue that 2003 might at least mark the low point from which confidence can
return.
-By Howard Wheeldon, Dow Jones Newswires; howard.wheeldon@dowjones.com;
44-0207-842-9251
(END) Dow Jones Newswires
01-27-03 0800ET |
