Rudi's View | Oct 17 2024
Part Two of this week's Weekly Insights contains:
-Profit forecasts in Australia and the USA
-Uranium stocks on the move
-Lithium spurred on by take-over enthusiasm
-Steadfast Group
-October Global Fund Manager Survey by Bank of America
-Best Buys & Conviction Calls
-FNArena Talks
By Rudi Filapek-Vandyck, Editor
The local share market looks "expensive"?
On Macquarie's number crunching the market's Price-Earnings (PE) ratio has now reached 19x next year's (FY25) forecast EPS. Added info: on Macquarie's forward-looking projections the average EPS in Australia will be another negative -4.3%, following on from the negative -4.4% recorded for FY24.
Readers who pay attention will have noticed Macquarie's numbers look worse than market consensus which still assumes a recovery in local profits that has the average EPS growing (positive) by some 3%. UBS is expecting an upgrade cycle that will lift that number to circa 6% by mid next year.
The difference, it turns out, is Macquarie is a whole lot more negative on the resources sector; projected EPS -15.7%, having already printed a negative -17.4% for FY24. But even ex-resources, Macquarie's projections remain below average with projected FY25 EPS ex-resources sitting at 1.6% positive.
Whatever is our personal bias towards these projections, Australia remains positioned in the low-to-no-growth basket of global markets. Elsewhere around the globe analysts' forecasts are projecting a generally robust recovery in corporate profits with developed markets generally expected to see profit growth of 13% and with the USA yet again outperforming with an expected 15% growth on average.
It does make one wonder what exactly is the secret elixir that turns corporate America into the Obelix of the world, time and again?
One obvious ingredient, it turns out, is Gen.Ai. Past the millions of dollars in investments made into data centres and power generation capabilities, corporate America has become an enthusiastic integrator of the new technological breakthrough into business processes and supply chain management.
The result, if everything works out according to plan, is for extra growth acceleration through higher margins and/or additional revenues. Growth that otherwise would not be on offer.
But how confident exactly can investors be these forecasts do not end up as pie in the sky? Equity indices continue to reach for fresh all-time record highs and multiples look elevated including Gen.Ai benefits that are yet to show up, hence a little bit of skepticism looks at least a little bit justified.
Analysts at Morgan Stanley interviewed decision makers in 400 businesses over six different industries spread over five countries and it appears the early signals are supportive of analysts' forecasts. There's still plenty of hesitancy around, but those projects that are put in place are proving "surprisingly positive" outcomes, the analysts report.
In particular larger companies are noticing the benefits.
The survey also revealed a distinctive gap between larger and smaller-sized 'adopters' whereby the larger companies are focused on cost reduction (i.e. margin expansion) in contrast to smaller companies that are looking to increase revenues (i.e. grow the business).
Bottom line: Morgan Stanley's confidence in the delivery of concrete benefits through Gen.Ai via corporate profits in 2025 has only been strengthened. Wouldn't be the first time America is leading the rest of the world either.
Elsewhere, US strategists at the firm remain skeptical whether smaller caps in America are now poised to outperform the bigger end of the market. Many an investor is hoping for a small cap blast after 3.5 years of painful underperformance, but Morgan Stanley stoically refuses to join the crowd.
For small caps to decisively outperform, the economy needs to start firing on all cylinders, the strategists explain. By all means, there's no sign such acceleration in momentum is imminent. Morgan Stanley has upgraded US small caps to Neutral. That's as far as the strategists are prepared to shift at this point.
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