Profit warnings leap as economic uncertainty takes its toll

Analysis by Ernst & Young revealed a 70pc leap in the number of profit warnings, from 51 in the third quarter to 88 in the final quarter, marking the biggest jump in a decade. During the year as a whole, there were 278 profit warnings, compared to 196 the previous year.

Warnings in the quarter from the likes of retailer Mothercare and Premier Foods, the maker of Mr Kipling cakes, pushed the proportion of listed companies who put out warnings in 2011 up to 14pc, the highest since the financial crisis first started in 2008.

As cash-strapped customers curbed their spending, retail was the worst-hit sector, with 39 profit warnings issued last year, more than the whole of 2009 and 2010 combined.

But Alan Hudson, head of Ernst & Young’s UK restructuring practice, said that although consumer-facing sectors had been hit hard by the sharp fall in disposable income, there were still successful companies across these sector that were performing well.

“Shoppers are still willing to splash out on items or experiences that they value, but the pressure on consumers’ coffers means if they are spending more to create winners in one area, there will inevitably be losers in others,” he added.

Although the high street’s travails have grabbed headlines, the pain is also being felt across many other sectors. Last year, the software and computer services sector issued 31 warnings, the highest number since 2008, with a fifth of the sector cautioning on profit during the course of 2011.

“Both are highly reliant on the vagaries of spending in their end markets - primarily business and the public sector – and both are therefore highly sensitive to rising levels of uncertainty or falling levels of activity in the broader economy,” said Mr Hudson.

“This sensitivity can make both industries useful bellwethers and the sharp rise in profit warnings in both sectors at the end of 2011 was certainly indicative of a changing economic outlook.”

He added that the sharp rise in warnings across all sectors demonstrated that 2011 was a tough year for companies and that the new year was likely to continue in the same vein with the gap between the winners and losers widening.

“Many businesses are still expanding profitably, but others – the zombie companies – remain moribund by debt or defunct business models, unable to build value or gain momentum in these challenging economic conditions,” he added.

Profit warnings in the first weeks of the new year have come primarily from companies vulnerable to contract and order cancellations, as customers wait for more economic certainty before committing to further significant outlays, said Mr Hudson

“Companies in industrial, IT and support services sectors have proved vulnerable to contract delays in the past and further profit warnings are likely from these sectors until the political and economic outlook stabilises,” he added.

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Euro area bonds "creep" to the top on the uncertainty of rescue

The leaders of the 17 countries in the euro area met in Brussels to agree to the economy of the Greece plans to reaffirm, announcing that the Fund currency International and Member nations would provide €109bn rescue, while private banks would add an additional $ 50 billion €.

But the inclusion of the private sector is the Greece at the risk of default and details of exactly how the rescue plan would work were not clear enough to convince investors. Adding to the uncertainty was the decision by the rating agency Moody's this morning to downgrade Greek debt to Ca - as a rating above by default.

Thus the European bond yields shot upward today. UK links pink 3pc, with the Italy and the Spain being charged FP6, Portugal 10 2pc, Ireland 11 (5pc) and the Greece of more than ten years almost 14pc.

Analysts claimed these rates, might continue to rising until concrete details are provided. Lyn Graham-Taylor, fixed the Rabobank income strategist, said that the agreement is one step larger until the market expected, but may fail unless details are made public.

"Finally people were referring to d - Word, by default.". Everyone realized this is going to happen, "he says.

But the uncertainty would cause yields to "continue to infiltrate more", he warned.

"If the details which are generally a kind of watering-down, expect, they will be, we will gradually see a risk-off gesture,"he added."". Until more concrete details emerge it y a "progressive higher sliding" in yields, because investors wary. "When you try and dig in where the 109bn is finally of, it is impossible", he said. "What money are they particularly of earlier rescue that is not yet distributed."

Details may be some time to come, even if, as Angela Merkel, said last week that the concrete plans would not be published until after the parliamentary summer recess - that could leave investors guessing until September.

There is also concern that the agreement could difficulty when she faces the German Parliament.

Michael Hewson, CMC Markets analyst, said: "in Europe the benefits in Germany began in new rescue last week for the Greece with a firestorm of critically come Angela Merkel in her apparent cellar in changes in the EFSF.".

"His former economic advisor and now head of the Bundesbank, Jens Weidmann, is one of many critics who accuse them of taking risks with the fiscal sovereignty of the Germany."

"With all changes to the EFSF requiring approval of the Parliament, Brussels agreement last week looks as if she might well have the easy bit as changes are beginning to be debated in parliaments of the EU."

"Thus, gold prices have emerged in Asia hit New Records investors seeking a safe haven far fears of a possible default and an almost certain ratings us credit downgrade, if the events continue in their ordinary sense.".

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