Earnings Forecasts: Voodoo Science, Pt 1 of 2
NEW YORK ( TheStreet) -- The IMF just updated its forecasts for growth. Once again developing countries in Asia, Latin America and Africa are outpacing the U.S. and Europe by two, three and four times. Of course, U.S. corporations are extending their operations in developing countries. However, what is good for growth is bad for the accuracy of annual or quarterly earnings forecasts. There are multiple reasons for this.
For many CFOs, it will simply stretch their capabilities to accurately forecast the financial impact of big threats, like militant uprisings, surprise regulations, or social unrest in the markets served. In part, the challenge is media censorship. In part, it is the challenge of estimating the risk of the unimaginable. Remember the destruction to Fonterra's (NZ) financials and brand? It was a result from a joint venture with state-owned Sanlu, which was operating under the directives of China's Propaganda Department to conceal the devastation from contaminated milk products.
In the early 2000s, pundits talked about political risk like it had been relegated to history. Then Venezuela, Argentina and Bolivia surprised some foreign corporate guests with industry nationalizations, and Venezuela, Belarus, and Ethiopia surprised partners and investors with big currency devaluations.
It's easy to spring big government-action surprises for the 20+ governments headed by super presidents, like Russia, supreme or paramount leaders, like China, or all-powerful monarchs, like the six nations in the Gulf Cooperation Council. Not only can decisions be made fast, the media is tightly controlled.
In the U.S., there are advance warnings of impending government actions. Some that bring joy are U.S. trade sanctions. But sanctions are quid pro quo. In the past five years, for each complaint filed by the U.S. with the WTO, one has been filed in return.
Last year, the U.S. went after China's solar panel industry. It was good news for domestic solar panel makers, but bad news for domestic producers of polysilicon, because China threatened tariffs on their products. Last year, when the U.S. filed a trade dispute threatening sanctions against Chinese auto parts exporters, China responded the same day with increased tariffs on autos from the Big Three.
The U.S. is a world-beater when it comes to flexible labor regulations. If a business needs to trim back costs to meet projections, it's relatively easy and cheap to do this with a large layoff, or closing down a business. In many countries, this option won't be easy or cheap, and it may not be permitted at all.
Then there is the unexpected. This year Anglo American (AAL.L), following South African labor regulations, announced an impending mass layoff. The South African government countered with a threat to revoke its license to mine.