PREVIEW-Canadian profits to edge up as insurers shine; miners struggle
* Profit at TSX composite index companies seen up 6.0 pct
* Earning season heats up next week with CN Rail, Rogers
* Earnings at financial companies seen gaining 7.2 pct
TORONTO, July 18 (Reuters) - Canadian companies are likely to post only small overall gains in second-quarter profit, as strength in the energy and insurance sectors is offset by miners struggling with softer prices for gold and other metals.
Many analysts have already trimmed forecasts as some of the country's biggest companies prepare to report, with the choppy global economy and sluggish domestic growth cooling expectations.
"Earnings growth in general will be lumpy for the TSX this quarter," said Craig Fehr, a market strategist at Edward Jones. "We're going to get a lot of volatility and uncertainty associated with resource earnings."
Canada's quarter reporting season moves into high gear next week, with results from blue chips such as Rogers Communications Inc, Canadian National Railway Co, EnCana Corp and Potash Corp of Saskatchewan.
Analysts expect earnings from companies belonging to the Toronto Stock Exchange's S&P/TSX composite index to gain 6.0 percent in the second quarter from a year earlier, according to Thomson Reuters StarMine SmartEstimates.
But that average masks a disparate outlook for the market's three biggest sectors: materials, which include miners; financials; and energy.
Both precious and base metal mining companies have been under tremendous pressure because commodity prices have pulled back in the face of waning global demand, a situation unlikely to change this quarter, noted Fehr.
As a result, mean earnings estimates for the TSX materials sector have slipped 23 percent in the last three months, StarMine data showed. Share prices for the group are down 29 percent this year.
"That indicates that investors are bracing themselves for massive earnings revisions," said Elvis Picardo, a strategist with Global Securities in Vancouver. "If those companies manage to get over that low bar, you might see the market bottoming out for commodity producers."
"It's a make-or-break quarter for the materials sector," he added. "They need to at least match those lowered expectations. Otherwise there's a risk that you might see a minor selloff."
Prospects are brighter in the energy sector, where profit is seen rising 6.2 percent. Energy companies are expected to benefit from a rebound in the price of oil, which has climbed almost 11 percent since mid-April.
The discount between the price of heavy Western Canada Select oil produced by many of the region's companies and the lighter West Texas Intermediate benchmark has also narrowed, which should boost results.
"We're seeing a renaissance in energy prices," said Michael Sprung, president of Sprung Investment Management. "It will definitely reflect in earnings, but there's always a lag."
A weaker Canadian dollar, down more than 4 percent this year against the greenback, is also expected to help the many energy companies who sell into the U.S. market but have largely Canadian dollar costs.
Earnings growth is expected to be even stronger at financial companies, which account for nearly a third of the value of the composite index. Financial sector profits are seen rising 7.2 percent.
Some of the biggest gains are seen at insurers, which have rallied in recent months. Shares of Manulife Financial Corp , Canada's biggest life insurer, are up 80 percent in the last 52 weeks.
Insurers such as Manulife and Sun Life Financial Inc are heavily influenced by bond yields, which have been rising from historic lows.
Higher yields make some of the insurers' investment products more appealing and increase the expected returns from the bonds they hold to offset their long-dated insurance liabilities.
Investors are less excited about the prospects for Canadian banks, which start reporting later next month and have had to contend with a slowdown in lending growth.
"Capital markets activity is not exactly going through the roof, wealth management is a little better, and loan growth is pretty sluggish," said Paul Taylor, chief investment officer at BMO Asset Management.
Like many fund managers, Taylor doubts second-quarter earnings will provide much of a lift to the Toronto index.
"The conditions are probably not there for a really strong market," Taylor said. "In Canada, you have to have a stronger global economic backdrop and firmer commodity prices."
(Editing by Jeffrey Hodgson and Chris Reese)