Citi downgrades Australian company earnings in 2017, but thinks next year will be better

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Citigroup has nudged down short-term earnings forecasts for Australian stocks while raising its predictions for next year.

While recent events such as the bank levy, which could cut as much as 6% from the earning of the major banks, plus a crackdown on mortgage lending and drop in commodity prices can all threaten returns, the effects will be at best benign as investors had already priced in a housing slowdown and lower iron ore and coal prices, Citi analysts Tony Brennan and Mark Tomlins said in a note to investors.

“The past month or so has seen the usual heightened news flow for this time of year, both on company earnings, with the so-called confession season ahead of financial year end; and on policy,” the analysts said referring to company’s issuing profit warning and the budget.

“Contrary to the somewhat downbeat sentiment prevailing, company updates have not been that negative overall, with only a few weak areas.”

Citi’s note could offer some comfort to investors with the benchmark index down this month, led lower by banks. Economic data is also pointing to pressures ahead while retailers are struggling to grow sales.

This table summarises Citi’s views:

Citi said it was still promising for markets:

Overall, it would mostly seem that risks have increased a little. The global economy’s pick up may have moderated, with some slowing in China, but that may not go far without policy responding, given the firm growth targets this year.

The domestic economy continues to transition, but business conditions are reportedly the best in close to a decade, and while housing activity will ease, public infrastructure spending is picking up. This suggests reasonable earnings growth remains a realistic expectation, and the market would seem able to offer still decent returns in the next few years, around long-term norms of 10% a year including yield.

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