Getting Toppy?

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            [1] => ((BNB))
            [2] => ((AFG))
            [3] => ((CNP))
            [4] => ((NUF))
            [5] => ((QGC))
            [6] => ((PLA))
            [7] => ((OMH))
            [8] => ((NWH))
            [9] => ((HFA))
            [10] => ((TSI))
            [11] => ((AED))
            [12] => ((TIM))
            [13] => ((PEM))
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            [4] => NUF
            [5] => QGC
            [6] => PLA
            [7] => OMH
            [8] => NWH
            [9] => HFA
            [10] => TSI
            [11] => AED
            [12] => TIM
            [13] => PEM
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)

This story features LYNCH GROUP HOLDING LIMITED, and other companies.
For more info SHARE ANALYSIS: LGL

By Greg Peel

The recent low close on the ASX 200 was at 5086 on March 18, the day after “Bear Stearns Day” in the US. In surpassing 5960 today, the market has rebounded by 17%. The previous high, occurring on November 1, was 6828, so the ASX 200 fell 25% from its high to reach the March 18 low. Viewed another way, the index has recovered 874 of the 1742 points lost from November to March, or 50%. A 50% retracement, in anyone’s books, is a significant one.

It is also a technically important level, for a market is, so the theory goes, able to retrace by 50% without changing the trend. In other words, at this point we could well have completed the requisite bear market rally and will now resume the bear trend. Alternatively, the index could break to the upside (and in this case break through the psychologically important 6000 mark as well) and the bear market could be declared over.

We are poised.

What we do know, however, is that virtually all of the rally back from March has been due to movement in the resources sector, and related services, and the finance sector. Banks have bounced following the stabilisation of the US financial system, and thus the global financial system, following emergency actions by the Fed. Resource companies have surged along with commodity prices. Both sectors have now been spurred on further by takeovers or takeover speculation.

For the rest of the industrials, the story has not been quite as positive. Macquarie analysts have revised their total shareholder return (TSR) expectation for the twelve months ahead to +4.5% for the ASX 200, with resources accounting for +5.7% and industrials +3.9%. Of the 4.5% total, 4.4% is dividends (implying the index has already taken back all the upside there is left for the next twelve months – all things being equal, as they say). The strategists note FY08 earnings forecasts have been slipping and continue to do so, while the strategists’ FY09 earnings forecast for the market as a whole is a whopping +29.9%. This, of course, is all due to resources (+67.6%).

What we haven’t really heard much about yet is the Aussie dollar. Perhaps we won’t hear much about the currency’s effect on resource company earnings until its too late, as that’s what happened when the Aussie broke through US80c and started heading for US90c in early 2007. Stock analysts continued to work off US75c as an average, and then had heart attacks when one after the other resource company profits came in below expectation. Now the Aussie is back over US95c after a little foray down around 85c at the height of the credit crunch. That’s a 24-year high. Stand by for some more heart attacks.

UBS strategists note the market average price earnings ratio (PE) has now bounced back from under 12x to 13.6x. The long term average is 14.8x. They, too, note the rise in downgrades and suspect there are likely to be more. There is now less “headroom” in market valuation, they suggest.

Nevertheless, UBS is not expecting any great corporate collapses. The ongoing skew towards emerging market economies and their influence on global growth should benefit the Australian economy in general. The strategists suggest it is not unusual for the market to “rise into downgrades”, and they expect the index can push further yet, but probably at a more moderate pace.

Once again – we are poised.

JP Morgan has made its traditional predictions for promotion and relegation on the league tables come June. Inclusion in an index (which is determined on a market cap and volume traded basis) can mean a boost for a stock as it will need to be purchased by those funds which track a specific index, such as the ASX 50 for example. Likewise, to be booted out means forced selling.

JPM does not believe Lihir Gold ((LGL)) will replace Babcock & Brown ((BNB)) in the ASX 50, leaving that index as was. The analysts do, unsurprisingly, expect the ASX 100 to lose Allco Finance ((AFG)) and Centro Property ((CNP)) possibly to be replaced by Nufarm ((NUF)) and Queensland Gas ((QGC)). Commodities win again as leveraged finance sails into the sunset.

In the all-important ASX 200 the story is not dissimilar. Additions should be the lesser known names of Platinum Australia ((PLA)), which is a miner and should not be confused with the fund manager of the same name, manganese producer OM Holdings ((OMH)) and mining services and construction provider NW Holdings ((NWH)). These names have one, none, and two brokers from the FNArena database respectively covering them. The other addition should be fund manager HFA Holdings ((HFA)).

It’s a big year for the Holdings companies.

Pink slips should be given to Transfield Infrastructure Fund ((TSI)), AED Oil ((AED)) which is bucking the trend but has proven a bit of a dry bet, Timbercorp ((TIM)), which lost its tax exemption status and Perilya Mining ((PEM)), which just hasn’t been cutting it.

As the ASX 200 has become the equivalent of the US S&P 500 in terms of a broad market preferred gauge, these additions and omissions are significant. You may soon find a demand for coverage of those lesser known names, which tends to boost their prices on a simple recognition basis. Furthermore, as the ASX 200 is the index from which the SPI futures contract is set, proprietary traders in the business of stock/futures arbitrage will need to start trading in those names too. But be warned, this can mean short-selling as well as buying.

JP Morgan notes there will likely be no changes to the ASX 300.This is reassessed in September.

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