ASX still looking for the sweet spot

Market trading statistics for the first seven weeks of the ASX's new financial year confirm that the market rally is not yet super-charging its earnings.

A strong second half helped the group boost operating revenue by 1.1 per cent to $617.4 million in the year to June, and underlying net profit edged up by 0.6 per cent, to $348.2 million.

The crucial question, however, is whether the rally in trading activity that carried the ASX into positive territory will continue, and the latest trading figures don't provide an answer.

Operating revenue fell by 3.3 per cent in the first half compared with a year earlier and then rose by 5.8 per cent in the second half. Cash equities market revenue fell by 18 per cent in the first half and rose by 3.8 per cent in the second half, and derivatives market revenue fell by 2.3 per cent in the first half and rose by a solid 11.7 per cent in the second half. Information services revenue staged a similar second-half rally.

ASX chief executive Elmer Funke Kupper says that in the first seven weeks of the new financial year, trading in the sharemarket has averaged $3.8 billion a day, up 7.7 per cent on the same period a year ago. An average of 396,682 contracts a day have been traded on the exchange's ASX 24 derivatives market over the same period, 14.9 per cent up.

As Funke Kupper pointed out, however, the 2012-2013 year got off to a very slow start as investors fretted about the possibility of a European sovereign debt meltdown.

The S&P/ASX 200 Index was sitting at 4096 points at the end of June 2012. It was at 4330 points seven weeks later, but had not yet absorbed European Central Bank president Mario Draghi's late-July promise to do "whatever it takes" to defeat bond market attacks in Europe's key financial battlefields, Spain and Italy.

As confidence grew that Draghi could deliver, however, a surge occurred. The index was at 4705 points by the end of 2012, and hit 5220 points in mid-May. It has fallen and recovered again since then, but averaged 4995 points in the June half-year, and is above that now, at 5075.7 points.

The rises in activity that the ASX has reported for the first seven weeks of the new financial year are therefore a bit misleading.

The cash market daily average trading value of $3.8 billion a day in the first seven weeks of the new financial year may be 7.7 per cent up on the same period last year, but it is well below average daily trades of $4.55 billion in the June half. It is also below the average daily trading value of almost $4 billion in the June half of 2009, when the global crisis peaked.

Similarly, the 396,682 derivatives market contracts that ASX handled in the first seven weeks of the new financial year are 14.9 per cent up on the same, weak period last year, but well below the average daily volume of 509,194 contracts in the June half.

Seasonal factors make such comparisons imperfect. The expiration of derivatives at the end of March and June always inflates turnover, for example, as investors roll their exposure into new contracts. There were no rollovers in the first seven weeks of the new year.

Funke Kupper says that market stability has improved after the ructions in May and June when investors realised that America's quantitative easing cash splash was drawing to a close. Signs of a return to growth in Europe mask continuing structural problems in that region, he says, but the US will support all markets if its recovery continues. The trading environment is not brilliant but "feels OK", he says.

It is clear, however, that the market rally that began in earnest in mid-November last year has not translated into a sustained and powerful increase in trading activity, or in floats and follow-on share issues by listed companies. That's true here and overseas.

ASX needs both prices and volumes to lift to be at its best. It is not in that sweet spot yet, and Funke Kupper isn't predicting when it will be.

Dividend surprise

Fortescue Metals lifted net profit by 12 per cent to $US1.75 billion in the year to June, but it was its decision to declare a 10¢ a share dividend that propelled its shares 4.2 per cent higher on Thursday in a market that fell by a half a per cent.

Fortescue paid interim and final dividends of 4¢ a share in 2011-2012 but suspended payments in the December half after a plunge in the iron ore price forced it into debt renegotiations. It reset its debt and the iron ore price bounced, but there were still brokers predicting no dividend at all for the June half.

Dividend surprise is one of the emerging themes of the profit season. Goldman Sachs noted at the start of this week that the ratio of positive dividend surprises to negative dividend surprises was 2.6 to 1, the highest since 2009 when it began tracking the data.

It is partly a sign of the times: boards know that investors want strong dividend yields. To the extent that it is also a vote of confidence in the future it is welcome, however.

mmaiden@fairfaxmedia.com.au