View from City Road: Be wary of high profit forecasts

IS HOPE triumphing over adversity? Stockbrokers are forecasting a rise in profits of 20 per cent or so for next year even though most of them expect the economy to grow by 1 per cent or less. At first sight the gap looks hard to justify.

Some brokers are especially optimistic. For example, Nomura's Nick Knight expects profits to rise by 30 to 50 per cent over the next two years. Towards the other end of the spectrum, Kleinwort Benson expects growth in industrial profits of 10 per cent next year. The consensus is for about 13 per cent growth in industrial companies and more than 15 per cent for the whole market.

Some fund managers regard even this as far too high. Legal & General, which is keener than many on bonds, reckons industrial profits will grow by only 6 per cent.

Four factors stand out when considering next year's profit rise. The first is the devaluation of sterling by about 12 per cent since Black Wednesday. As overseas profits account for about 40 per cent of the total, the translation benefits alone should add about 5 per cent. Exports should also benefit but they remain a small factor in the overall make-up of quoted companies' profits.

Lower interest rates will also be helpful but far less important than might appear. This is because a large number of companies have borrowed at fixed rates or in the US where rates are already lower than in the UK.

Productivity, the third factor, will be far more important. Although companies have been shedding jobs at an enormous rate this has merely allowed them to keep their costs in line with falling demand. With a real prospect of stable or even rising volumes, the financial benefits of huge redundancies should now boost profits. Phillips & Drew reckons this will add 10 per cent to domestic profits - which translates into about 6 per cent to the total.

The fourth and most variable factor is economic growth. Nomura's more optimistic projections are based on increases in gross domestic product of 1.7 per cent, well above average in the UK whereas others are far more cautious. Gains in the US, however substantial, could be partly offset by downturns on the Continent, particularly in Germany.

On this basis it is easy to see that profits of quoted companies might grow by 12 per cent or so next year. But forecasts much higher than that must be relying on guesswork, which is hardly a reliable basis for investment. Caution is in order.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss