Thursday, 16 May 2013

Today’s Budget – the outlook for profits

As I've indicated earlier, some of the best stuff that comes along in the Budget isn't in the Budget speech itself or in the main supporting documents like the Economic Outlook, but are tucked away in the more subsidiary supporting tables and statistics. The thing I always reach for first is called the ‘Additional Information’ – it doesn't sound very promising, but that’s where all that cyclically-adjusted and commodity-price-adjusted data came from, for example.

It's also the source of Treasury's forecast of the level of profits in the economy. As far as I know, there isn't any other regular, authoritative stab at forecasting business profits, and Statistics New Zealand doesn't publish quarterly profit statistics like the ones you get in Australia or the US. Yet it's self-evidently an extremely important measure of how New Zealand businesses are travelling, and it's essential if you want to have some feel for the correct valuation of New Zealand equities.

In the 'Additional Information' material you find a forecast of what Treasury calls 'Net operating surplus': this is a good proxy for what's happening to profits. Excluding agriculture, profits are expected to have risen slightly in the year to March ’13 (+1.5%), are expected to have a boomer of a year this coming year (+13.9%, year to March ’14), and then to have a string of fairly small increases (+2.5% to March ’15 , +4.2% to March ’16 , and +1.6% to March ’17).

What that suggests to me is that the recent strong rises in the New Zealand share market have had some solid macroeconomic justification (investors were likely taking on board the coming year's good times), but something else probably needs to come into the mix to take local shares higher again.

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