Rudi's View | Jun 07 2007
(As Far As Securities Analysts Are Concerned)
This story was sent out two days ago in the form of an email to paying subscribers of FNArena.
By Rudi Filapek-Vandyck
It is probably a fair bet that it will be rising bond yields that will ultimately slow down the relentless bull market for global equities. So far, most investors have spent little attention to the fact that yields on US Treasuries have been creeping higher over the past few weeks.
In fact, at 4.95% -or thereabouts- yields on ten-year government bonds in the US are at a level not seen over the past nine months. However, there’s nothing to worry about, say economists and global strategists at brokerages such as Macquarie and research institutions such as Bank Credit Analyst.
The first argue that higher bond yields are a good thing as they are the result of better than expected economic growth, and not of growing price inflation. The latter believe bond yields will stop rising soon as current market projections about a pick up in US economic growth are too quick, too soon.
Global equity markets have tuned in on the sunny side of global economic developments. As economic data have continued to paint a picture of low inflation and recovering economic growth in the US, while the rest of the world continues powering along with equally contained inflation, it would seem there’s little in the way of share markets advancing further.
FNArena already spotted the first research reports with predictions that interest rates and bond yields in the US won’t come into play until the second half of calendar 2008, suggesting global liquidity and low bond yields will continue feeding the bull market through higher than normal risk appetite and elevated share price valuations.
So is there really nothing left to be worried about?
Analysts at research house GaveKal have asked themselves this question repeatedly over the past month or so and their conclusion is pretty much affirmative: it would seem there’s nothing left to be worried about. Not for now, and with the exception of the odd disaster from left field, of course.
“The one thing I learned is important crises are always coming out of left field”, former US Federal Reserve chairman Alan Greenspan said in a recent interview. The problem is one cannot predict these left field occurrences, nor time them.
Is there really nothing left to worry about?
Oh sure, there’s always plenty to worry about. Market commentators such as Gerard Minack, nowadays at Morgan Stanley, and Stephen Roach, equally employed at Morgan Stanley, have made a living out of it.
There’s still no consensus about where commodity prices are heading. Meanwhile securities analysts are being forced to play catch up with the reality of higher than expected spot prices while negotiations for bulk commodities continue to surprise as well.
The Chinese share market is currently undergoing a correction in anticipation of further measurements by the government who seems determined to stop the speculative investor frenzy of the past fifteen months.
The US economy might still need Fed support to fend off a recession.
However, nothing of all potential future problems seems genuine or imminent enough to spoil the current Goldilocks party.
FNArena has found this overall optimism is currently also reflected in individual stock projections and recommendations by securities analysts at ten leading research houses in the Australian share market.
With the local share indices near all time highs, and despite many a market commentator calling for an overdue correction since the beginning of May, analysis of some 477 ASX-listed stocks in the FNArena database shows more than half (51%, 245 stocks) of these stocks is still expected to generate a positive return in the year ahead, even without taking into account dividend payouts.
The average projected dividend yield for Australian shares in the year ahead is circa 3.5%.
More than 34% of the stocks (164) are projected to appreciate in price at least 6% over the next twelve months. 27% of all stocks (130) should generate an ex-dividend return of at least 10%.
These are not the type of figures one would expect to see from a market that has been labeled “overvalued”, “valuation stretched” and “due for a correction” repeatedly over the past few weeks. Only 105 stocks, 22% of total, are projected to lose more than 4% in value in the year ahead, meaning even with an average dividend yield of 3.5% these stocks should still generate a negative return.
The Australian share market has now gained approximately 27% over the past twelve months of which 15% since early December, beating most share indices from developed countries over the period. On figures provided by Thomson Financial the market’s PE ratio is above 17 for FY07 and just under 16 for FY08.
In comparison with international markets, many stocks in Australia are nowadays trading at a premium versus their international peers. This is true for oil and gas stocks, as well as for financials, consumer staples, information technology, most industrials, healthcare and utility stocks. Resources and other materials stocks continue trading at a slight international discount, and so do telecommunication stocks.
According to Rob Pinnuck, quantitative analyst at GSJB Were, it could be argued that five local sectors are trading at relatively favourable multiples as their projected earnings growth figures should outshine those of international peers. These five sectors are Consumer Staples, Energy, Health Care, IT and Materials (which includes resources).
The FNArena Sentiment Indicator currently ranks drilling services provider Boart Longyear (BLY) as the most highly recommended stock in the Australian share market with a reading of the maximum 1.0 (five out of five Buy recommendations). The stock’s average price target suggests further share price potential of 10.5% plus more than 1% in dividends.
Number two is struggling copper producer Aditya Birla (ABY) with a projected potential return of circa 50%, dividends included, but on the assumption that management finally gets it right.
Number three is Rupert Murdoch’s News Corp (NWS) which is seen trading some 24% below its potential as a deal with the Bancroft family over Dow Jones & Co seems less illusory than it was three weeks ago. (The market doesn’t like News Corp succeeding in this as the offer for Dow Jones is seen as excessive).
Fledgling iron ore producer Fortescue (FMG) currently has the highest projected negative return (minus 55%). However, this has nothing to do with the shares being overvalued, but more with the fact that JP Morgan analysts have yet to update their figures for the latest developments.
Average forecasts by securities analysts can change at any time and are not always correct. They can serve as guidance or as a tool for value-seeking investors.
The above analysis is based upon 477 ASX-listed stocks that are covered by at least one of the following experts: ABN Amro, Aspect Huntley, Citi, Credit Suisse, Deutsche Bank, GSJB Were, JP Morgan, Macquarie, Merrill Lynch and UBS.
All projections are based upon average price targets and closing share prices as at Tuesday June 5.