Markets: Rounding the bulls

Perpetual’s Matt Sherwood cautions that analysts seem overly optimistic about earnings amid China concerns and a slowing domestic outlook.

Analysts are forecasting 11.5 per cent earnings per share growth for Australia’s S&P/ASX200 Index in the 2014 financial year. That is “pretty optimistic,” says Perpetual strategist Matt Sherwood, and depends on companies' abilities to cut costs amid tepid economic growth.

Analysts have forecast EPS growth for industrial stocks, ex banks and as much as 20 per cent for mining shares. “That will be very difficult to achieve as China’s growth will only slow with weaker credit growth,” says Sherwood.

In the 12 months to June 30 the S&P/ASX200 Index gained 17 per cent. Since June 30 the index is up 4 per cent. Sherwood argues the index’s rise came at the expense of improved earnings. Like others, Sherwood says the Reserve Bank of Australia is likely to cut its benchmark cash rate to a new historic low next month to boost the economy. But he remains skeptical as to whether just one rate cut will produce the economic turnaround so desired by the Reserve Bank.

Sherwood says more than one rate cut is need particularly as the Australian dollar is “jammed in the low 90s” and the Reserve Bank “wants it in the low 80s”.

At 1508 AEST the Australian dollar was trading at US cents, 92.73, up 0.3 per cent from yesterday where it was trading at US cents 92.49, according to Bloomberg data. Since July 12 when it was at US90.49 cents, the Australian dollar has climbed 2.5 per cent, according to Bloomberg. 

“The August Reserve Bank board meeting should debate the size of the rate cut, rather than the cut itself,” says Sherwood.