Canadian earnings reports gain momentum this week

Analysts say investors are likely in for a mixed earnings picture, depending on what commodities these companies produce.

“We are going to get a bit of a mixed bag in terms of the numbers,” said Pat McHugh, senior portfolio manager at Manulife Asset Management.

“Energy is certainly up over the last three months but natural gas is off 40%. Copper is up. Nickel is up. Zinc is up. Gold is mixed.”

Strong stock gains by companies reporting could also be elusive since the resource-heavy Toronto stock market has been climbing fairly steadily since the recent lows at the end of the third quarter of 2011. The TSX had a particularly strong January, up more than four per cent.

“In January for example, the materials were up 10%, integrated oils up 12%, paper and forest up 14%, a huge, huge move,” said McHugh.

“So if there is something people don’t like, then they may be quick to take some profits.”

Investors will particularly focus on the outlook offered by resource companies. Strength in the Chinese economy has been important for the sector since the rapidly expanding economy has had a huge appetite for oil and minerals.

China has had to slow its economy in order to rein in uncomfortably high inflation, particularly for housing and food, but recent data is raising confidence that the government has managed to slow the economy gradually.

“They have been raising interest rates and tightening monetary conditions,” said Gavin Graham, president Graham Investment Strategy.

“Now they can start loosening monetary policy. And they have shown they are willing to do so.”

Investors will also take in the first earnings reports from the big insurance companies as Great-West Lifeco (TSX:GWO) reports on Thursday.

Like other insurers, Great-West has had a tough time because of a combination of very low interest rates and weak stock market performance, which diminishes their returns and increases the value of liabilities that stretch far into the future.

But Graham thinks Great-West should do better than the competition as they, along with Industrial Alliance, have a reputation as the most conservative of the big four Canadian insurers.

He also thinks there is the potential for Great-West to do better this year if the stock market continues to improve and bond yields rise.

“Unless you believe that we’re going to have permanent two per cent 10-year government bond yields for the next decade, and that the stock market will be no higher than it is now, in 10 years, then quite frankly these things are pretty cheap,” he said.

“And if you want the conservative way to play it, Great-West would be the one.”

Meanwhile, stocks finished last week higher thanks in part to a stronger than expected American jobs report for January. A total of 243,000 jobs were created in the United States, far better than the 150,000 that economists expected.

A recovery in U.S. employment levels is considered necessary to spur economic growth, which would be good for America’s trading partners, including Canada.

The TSX ended the week up 110.78 points or 0.88% on top of a gain of more than four per cent for the month of January.

Despite the strong data, McHugh wasn’t so sure this would translate into the start of a fresh rally.

“We’re cautioning people that the market from the lows of the third quarter is up about 20%,” he said.

“So it is possible that we might see some pullback or at least some sideways movement in the market and that’s OK because we’ve had a nice move since the last quarter of 2011.”