Australia | Jul 09 2010
By Greg Peel
Herston Economics chief economist and star of business television, Cliff Bennett, believes we are now looking at synchronised bull markets across global equities. We have seen the bottom, says Bennet. At least, that's his early call with a bit of a caveat that were the US and Australian markets to make fresh lows he might be wrong.
Bennett suggests markets are beginning to price in stronger manufacturing and consumer activity ahead. The euro and Aussie have also begun bull phases to maintain the US dollar's more major bear trend, oil is rallying us forward, but gold will suffer short term weakness before Chinese and Indian seasonal buying kicks in again in the fourth quarter.
Bennett is happy to note that many major banks and broking houses are still advising caution, and also that the recent pop has not changed the views of the serial doomer-gloomers. This, says Bennett, suggests the shorts are yet to change their minds and provides scope for “awesome” potential upside.
If some brokers are still wary, RBS Australia is not one of them. RBS has today made a similar call, suggesting we are now entering the first (financial) year of synchronised positive global economic growth since the FY08-09 declines. Despite still serious macro “pressure points”, the strategists are confident that the gradual economic recovery is sustainable, and that the market has already excessively discounted structural and cyclical risks.
There is a lot of talk that consensus Australian earnings growth forecasts for FY11 of 24% (FNArena: 19%) are too high and will need to be revised down, but RBS suggests the figure is both defensible and achievable. The strategists believe corporate investment and capital expenditure is the next global growth driver, and that positive micro issues will eventually overcome negative macro issues.
To that end, RBS is forecasting a 21% return on Australian equities to end-2010 based on a conservative 12.8x earnings multiple. That means 5300 for the ASX 200 in sixth months and 5600 in twelve.
Obviously, Australian banks stocks need to be part of any substantial rally, and Morgan Stanley suggests that under base-case forecasts, “some” valuation support has emerged.
On Wednesday I highlighted analysis by JP Morgan that suggested bank funding costs will prove the toughest headwind going forward, and the analysts downgraded their FY11 earnings forecasts as a result (Banks At The End Of Their Tether?). But in the same breath JPM noted that the market had already well factored in such funding headwinds.
Bank analysts across the broking fraternity have been pointing out various bank headwinds for a while now, and began to downgrade expectations even as this correction phase was only beginning. Morgan Stanley has once again rattled them off – funding challenges, lower retail bank profitability, and regulatory uncertainty among them, as well as prices that already reflect a return of bad loan provisions to normal levels ahead. So the analysts' view is that it may be time for a pause in bank share price weakness, but this does not mean the problems have gone away.
Cliff Bennett would no doubt count Morgan Stanley amongst those still cautious brokers.