Bleak picture in earnings forecast

Macquarie Equities appears to have been the first of the big broking firms to have broken ranks and declared that corporate earnings from listed companies on the Australian market will be down as much as 5 per cent to 10 per cent next year - a far more dismal scenario than the current consensus of 12 per cent growth.

At the same time Goldman Sachs JBWere has penned a note to clients containing a list of Australian corporations that have relatively high gearing and need to refinance their debt over the next year.

The two reports combined present a sombre picture for the potential impacts of the high cost of fuel and the high cost of debt.

While there is not a great overlap between the two groups, the combination suggests there are not too many safe havens for investors in the equities market.

Goldman Sachs JBWere doesn't suggest that all the highly geared companies won't be able to replace existing finance but it does point out that it will be more expensive and will impact on the companies' earnings.

It's not surprising that many of the heavily geared group fall intotwo sectors: property and infrastructure.

Heading the list is Macquarie DDR Trust, followed by Energy Developments and Bunnings Warehouse Property Trust but dotted among the top 10 are some less obvious names, such as Timbercorp, Amcor and Paperlinx, and lower down there are other industrials such as Adelaide Brighton and Futuris.

Most of the companies on Goldman Sachs JBWere's far more extensive list have already seen their share prices marked down for risk. But they have not necessarily had their earnings downgraded to reflect the higher cost of debt.

The Macquarie team has been conducting a more wide-reaching study of the impact of fuel costs on earnings and the ramifications beyond consumer spending patterns.

Its premise is that the surge in oil prices, if sustained, will have a major negative effect on corporate earnings growth through the combined effects of higher costs, softer revenue and via inflation on higher debt servicing.

It appears that to have immunity from these negative forces, a company must sell a product that is essential rather than discretionary, have below-average transport exposure, a strong balance sheet (that is, not too much of that expensive debt) and pricing power (preferably as a monopoly or a duopoly).

So good luck to investors trying to find these rare beasts.

Macquarie provides a few suggestions that tick most of the boxes. The most obvious is Telstra. The broker also nominates Singapore Telecom, which owns Optus. In the consumer staples area it points to Woolworths, Lion Nathan and Coca-Cola Amatil - based on the fact that we will continue to spend on groceries, beer and soft drinks. Not all these have strong pricing power but they do have strong balance sheets, and products we will continue to consume - even when money gets tight.

(Pricing power is important in this environment because higher fuel costs for companies can be passed on to consumers.)

There are also the big mining stocks and the companies that service them - such as BHP Billiton, Rio Tinto, Leighton and Orica. They are beneficiaries of the boom in China and are operating in a parallel Australian economy that is almost oblivious to what consumers are feeling.

Macquarie contends that petrol prices hit consumer confidence and spending hardest because only 40 per cent of households have a mortgage but almost all have a car or two. And because we buy petrol more regularly than pay interest we are constantly reminded of its cost.

The effect on consumer confidence is wide-ranging. We have already seen discretionary retailers report that demand is falling away. More recently, media companies such as Ten have noted that the rot has spread to advertisers, who are cutting their budgets. Travel is also being hit by the fall in demand, with tourism feeling the pinch and airlines being caught in the pincer of high fuel costs and softening of demand.

But it's not just a fall in consumer demand that affects profitability. Those manufacturers that are exposed to increased transport costs and high energy costs in the production process are also vulnerable. The ripple effects of higher oil costs are extensive.