Christopher Niesche: Crunch time as the slowdown begins to bite

The reporting season begins in earnest this week but, unlike other recent reporting seasons, the next fortnight won't bring too much good news. Instead, it's likely to cast a pall over the share market.

Over the past few years equity investors have watched company after company line up to report impressive earnings growth on the back of New Zealand's strongly expanding economy.

The stock market has had several years of fantastic gains. From the beginning of 2003 to the end of last year the NZX-50 rose nearly 73 per cent. A monkey with a pin could pick winners in a market like that, one broker remarked a couple of years ago.

But the easy gains have come to an end, a fact that will be brought home over the next couple of weeks. Tourism Holdings, Michael Hill and Fletcher Building, among others, report this week, followed by Sky City, Vector, Auckland Airport next week.

In general, we're likely to see the high currency, high interest rates and the slowing economy start to bite into earnings growth.

Indeed, brokerage First New Zealand Capital expects profit declines will slightly outweigh companies reporting profit growth - the first time we've seen that in several years.

Sky City, Auckland Airport and Air New Zealand are all expected to report lower profits than last year.

But there's likely to be more bad news. Even those companies that are still reporting earnings growth are likely to point to softer growth in the months to come.

Alongside this, we've got a backdrop of a stock market that's struggling to add to the gains of the past few years. At 3348 on Friday, the NZX-50 is down 0.7 per cent so far this year, while most other markets have grown strongly. The Dow Jones Industrial Average is up 1.9 per cent, London's FTSE-100 is up 2.6 per cent and the Hang Seng Index in Hong Kong is up 3.7 per cent.

In New Zealand, investors, aware of the tougher times ahead, are treading cautiously and putting money into offshore markets instead, brokers say. The number of trades on the NZX-50 in January - always a quiet month anyway - was down 15 per cent on January last year.

In such a negative environment, the market is proving hard to please, even with good news.

Take Freightways. Last week the courier company reported a 20 per cent increase in first-half net profit to $13.5 million. The earnings were good enough to prompt some brokers to upgrade their recommendations on the stock, but it didn't do anything for the share price.

In fact, the shares fell 3 cents on the day it reported and have dropped 4 cents more since then to close at $3.21 on Friday - not the sort of reaction you'd expect from a stock that beat market expectations.

True, Freightways did say trading conditions were "challenging", but it reiterated that it could meet the market's expectations for full-year net profit - so the outlook could hardly be called a surprise.

The negative mood in the market doesn't necessarily mean there'll be a sell-off or that the market as a whole is in for steep falls. But the torpor with which the market started the year will continue.

Even so, sentiment can change very quickly. A quick drop in the dollar and an indication from the Reserve Bank that it's going to start cutting interest rates and there'll be a fresh sense of optimism.