FYI | Nov 16 2009
(This story was originally published on Wednesday, November 11. It has now been republished to make it available to non-paying members at FNArena and readers elsewhere).
“It needs to be kept in mind that equity markets have commonly tended to produce fairly dramatic returns when recovering from major corrections, and have typically rallied further and for longer than they have this year. And we don’t see reason for it being that different this time.”
(Deutsche Bank strategy update on the Australian share market)
“I am running into more equity portfolio managers who are fully invested bears”.
(Ed Yardeni, President of independent market strategies provider Yardeni Research)
“A continuation of GDP upgrades and an improved earnings outlook indicate we are now firmly into the “recovery” stage on the investment clock. The combination of positive operating leverage, and a contained interest rate environment provide a “sweet spot” for equity earnings and prices.”
(Market strategists at Citi in Australia)
The above three quotes from the past week are probably a fair summary of the most commonly held expert view in global equity markets: shares are rising, investors are buying, though most lack conviction. Meanwhile, it is becoming increasingly difficult to ignore the facts: economies are improving, whether it is from a low base, gradual, slow or rapidly, sustainably or temporarily, but they are improving nevertheless.
And as far as the question about “sustainably or not” goes: we will have to find that one out as we go along. Sorry for all those investors seeking more security: it simply is as it is.
I do note, however, that confidence amongst economists and market strategists has improved by double notches over the past few weeks. This doesn’t take away that fears and concerns remain, which is a good thing because challenges and uncertainties remain. Take the parlous state of global bank balance sheets for instance. Giles Keating, head of global research at Credit Suisse, suggested this week it might take between five and ten years to sort that problem out in the US and in Europe.
Separately, market strategists at Citi acknowledge there is a real risk that the economic recovery in the US might turn out the second worst of all scenarios: a jobless recovery.
The dilemma most investors seem to be struggling with is: with these, and other, problems continuously hanging over the world economy, and over financial markets, how can the future still be positive?
To answer this question, I happily pass on the baton to Bob Doll, vice chair and director of Blackrock, one of the largest fund managers on the globe:
“We maintain our belief that after this quick run-up in growth, the developed world will transition into a period of lower long-term growth, as ongoing deleveraging will continue to act as a headwind for the economy.
“In such an environment, equity markets should be able to continue to gain, at least until global policymakers shift into tightening cycles. From our perspective, we believe we are at least several months away from that happening. Beyond that point, the outlook is less clear.
“The market rally appears to have evolved from one driven by liquidity influxes and policy measures into one based more on recovering corporate profits. At some point, we believe markets will require clearer evidence that corporate revenue growth is sustainable, and unless or until that occurs, we should see some continued back-and-forth action in the markets.”
As I pointed out in my Weekly Insights on Monday (see “Earnings Momentum Fading”) earnings momentum has slowed down considerably post the August results season in Australia. I note several experts in the US have observed a similar slowdown for US companies earnings estimates.
While hardly unexpected, this has taken away one of the main engines of support for the post-March risk assets rally. The second one, a weakening US dollar, has become less supportive too.
It is often said that bull markets require three key elements: valuation, liquidity and economic growth.
Given that share markets are trading at pretty lofty multiples for the short term (fiscal 2010), and the next round of corporate results is not due until late January-February, this implies that economic data will de facto become the main focus for investors. The problem at this point of the cycle is that economic data can be inconsistent at times, and thus a higher degree of market volatility seems almost guaranteed.
This is also a time when typically conflicting messages will continue confusing investors. At the time of writing this week’s editorial, investors are happily taking guidance from yet another batch of economic data in China that came out above expectations, while ignoring a rather ominous statement made by Xi’an Maike Metal International Group to a Bloomberg reporter that “copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year.”
The Bloomberg story continues: “We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year.”
The story ends with the prediction (by Luo): “The country’s imports of refined copper may halve to 1.6 million tons in 2010 from an estimated 3 million tons this year.”
Add the fact that technical chartists (at least some of them) believe that the US dollar might be poised for a spike upwards, and it should be clear that a strong finish into year-end and into the New Year remains far from guaranteed. (I have written extensively about the US dollar’s role in the present market so if you are new to this, and interested, I suggest you start reading some of my earlier stories on the website).
Certainly, the fact that after a few days of falling share prices in late October some genuine panic seemed to be creeping into investors’ market behaviour has convinced me that share markets are not necessarily resting on solid support during these final weeks of calendar 2009.
Yet, it may surprise many of you (it certainly surprised me) to read that strategists at Citi are now among the most bullish in the market, yet they seriously consider a scenario whereby US unemployment will not fall as quickly as many in the market are hoping for next year. Call it a “jobless recovery” if you want. Citi strategists still believe the US economy will print a positive growth figure next year. As will all other economies around the globe (those that count).
On Citi’s projections the Australian share market should find it harder to add further gains in the short term, but the projected level of the S&P/ASX200 index at 5000 by year-end still suggests gains of near 5% over the next eight weeks. Citi believes the index will hit 5500 by June next year (more than 15% upside, ex-div).
Macquarie strategists also updated their projections this week. Their revised projections are remarkably similar to Citi’s. As at 9 November 2009, Macquarie’s updated model is forecasting a total shareholder return for the S&P/ASX200 of 20.3% (that’s including dividends, thus pretty much the same as Citi’s forecast) and a target ASX200 index level of 5422.
Macquarie’s projections include a capital return of 16.0% plus a dividend yield of 4.3%. Within this, Resources are forecast to gain 10.7% and Industrials 24.1%.
For the Small Ordinaries, Macquarie’s forecast is for a gain of 24.8% and a target index level of 3041, comprising a capital return of 20.8% plus a dividend yield of 4.0%. The Small Resources is forecast to return 16.6% and Small Industrials 29.1%.
Macquarie and Citi might have similar projections about where the ASX200 index is likely to be in 2010, their selection in stocks is not necessarily the same. Citi likes banks and larger caps in general. Macquarie’s projections suggest smaller caps will generate better returns. Strategists at Deutsche Bank, on the other hand, believe banks are now likely to underderperform for a while. They like resources instead.
Citi likes international equities better than Australian, but I am not so sure whether I would agree with that – especially as Citi is also expecting the Aussie dollar will hit USD parity before mid-2010.
None of these experts will deny dangers and uncertainties remain. Big dangers and potentially nasty uncertainties. Their message remains the same though: underlying, the trend for equities remains up.
With these thoughts I leave you all this week,
Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always firmly supported by the Ab Fab team at FNArena)
P.S. I – In one word: strong. That’s how economists at National Australia Bank responded to this week’s release of NAB’s October business survey. And who could argue with that? To back up all of the above, I have included two charts that illustrate just how strongly business confidence and conditions are bouncing back in Australia. As I said above: the facts speak for themselves.
P.S. II – A graphic overview of current growth expectations for China next year. Given the strength behind the latest set of data (on Wednesday) and on the assumption that further data releases on Thursday will prove more of the same, I think it is only fair to say these forecasts continue to carry further upside bias. (With thanks to Westpac).
P.S. III – There won’t be a Weekly Insights the coming week. On Monday I will be giving a presentation in Sydney to the Australian Technical Analysts Association, probably more commonly known as ATAA. It is my understanding that everyone who wants to attend the presentation is welcome. Access is free for first time visitors.
Monday, November 16. Venue: The Auditorium, Level 1, The Bowlers Club of NSW, 95 York Street, Sydney, 5:30pm-7.30pm.
The following is taken from the ATAA newsletter:
5.35pm : Rudi Filapek-Vandyck: Analysing the analysts – another way of looking at market trends and trend reversals.
There is a general feeling that economists and securities analysts never seem to get it right. The Commodities Super Cycle became a fast bust and financial Armageddon turned into a 50% market rally instead. Should we simply ignore these experts from now on or can they be useful in another way? This presentation will outline some ideas from someone who has been using them in a different way for years now.
6.15pm: Meeting break
6.25 pm: Rudi Filapek-Vandyck: Looking inside financial markets – some alternative (better?) indicators.
Is a 50% share market rally exactly what the doctor ordered, or is it merely a case of too fast according to historical references? While most journalists and commentators continue focusing on the top line metrics, the real stories are to be found underneath the surface of financial markets. Therefore some alternative ways to find out more about the Australian share market, and they all tell a different story.
Rudi Filapek-Vandyck has been a journalist for more than two decades, the past thirteen years in finance. Since moving to Australia in 2000 he has helped establish various publications and projects, both here and overseas. Rudi’s latest venture is FNArena, an online newsletter which supplies financial and economic news stories, analysis and commentary on the Australian and global financial markets. Rudi Filapek-Vandyck is not only the Editor of FNArena but also a regular contributor to the Eureka Report, other publications and a regular guest on Sky Business television.
There you have it! Say hi when you decide to join me on the day.
P.S. VI – All paying members at FNArena are being reminded they can set an email alert for my editorials. Go to Portfolio and Alerts in the Cockpit and tick the box in front of Rudi On Thursday. You will receive an email alert every time a new editorial has been published on the website.
