Earnings growth of 2.1% last year was worse even than the 3.2% seen during the deep recession of 2009, according to The Share Centre’s inaugural Profit Watch UK report.
The weakness in 2012 reflects a “perfect storm for UK listed firms”, said the report’s author Helal Miah, investment research analyst at the Share Centre.
“The three largest profit producing industries in 2011 all suffered at the same time, a rather unusual coincidence of events.
“Concerns about a slowdown in global growth brought lower commodity and energy prices which hit the big international basic materials and oil & gas industrials, while further write-downs in the banking sector pushed profits from financials down on already weak sales,” he explained.
Net profits rose in 19 sectors, but fell in 18, which represented the worst performance since 2008 and 2009 when the number of sectors posting falling profits outnumbered rising profits in both years.
In terms of earnings, FTSE 100 firms proved more resilient to sluggish domestic and global growth, with revenues from these firms rising 2.3%, versus only a 0.9% increase in revenues from FTSE 250 companies.
The graph below shows the respective performances of the FTSE 100, FTSE 250 and FTSE 350 indices over the past year.
Mid-caps managed to protect their margins better over the past year, however, with total net profit from large caps dropping 30.8% compared with 2011, while for mid-caps the decline was about half that at 16.5% lower than the previous year.
“Given the headwinds in the largest industries, revenues are likely to remain under pressure, but profitability should improve.
“At its current level, and based on typical valuations for the past four years, the market is implying profits will bounce back to £160bn this year. That will be hard to achieve and suggests investors are prepared to pay a higher price for profit,” Miah concluded.