There's a high wall of worry for investors to climb during next month's profit reporting season despite expectations that companies in the S&P/ASX 200 will deliver a decent increase in earnings for the 2017 financial year.
The problem is not profit from the last financial year, but the outlook for FY18. That's where investors should be focused on when management teams across the country hand in their earnings report cards starting from tomorrow.
The big question is which sector poses the biggest risk to your financial health. So far it is the listed retailers that have been stealing the unwanted spotlight due to the competitive threat posed by Amazon.com.
However, this fear is probably overstated if not misplaced. Sure, Amazon could disrupt the business models of some retailers, but its impact on the $26 billion sector probably won't be as pronounced as many fear with many local retailers already adjusting their businesses for the new environment.
The stocks I think investors should be scrutinising the most are those related to residential building and renovations.
The risks from this group have not really caught the attention of the investment community as housing prices have been far more resilient (so far) than what many feared. But strong prices for established homes isn't a good bellwether for this group as they are more exposed to new construction.
The fact is the value of new residential building activity appears to have peaked in April and is on a decline. While this means FY17 results will probably look good for the likes of CSR Limited (ASX: CSR), Brickworks Limited (ASX: BKW) and Adelaide Brighton Ltd. (ASX: ABC), it will be interesting to see what they say about FY18.
While these businesses (and their peers) are diversified, any material slowdown in domestic residential building activity will make a painful dent into their earnings. The surge in the Australian dollar also won't help as the high exchange rate makes imported rival products cheaper.
But it isn't only the outlook for new construction that should worry investors. The renovation market is also on a downtrend with figures from the Australian Bureau of Statistics (ABS) showing a 5.1% decrease in the value of the "alterations and additions to residential building" segment in the March quarter, compared to the December quarter on a seasonally adjusted basis.
The value of renovations has also dipped 0.1% compared to the same period in 2016 and this doesn't bode well for the Wesfarmers Ltd (ASX: WES) owned Bunnings Warehouse business, or for Metcash Limited's (ASX: MTS) hardware division. Paint manufacturer DuluxGroup Limited (ASX: DLX) could also be facing a challenging FY18.
Again, it is not the FY17 numbers that pose the biggest risk, but it's the clouded outlook for this group of stocks that needs to be scrutinised closely as some companies may try to present a rosier-than-justified picture.
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