MARKETS SPECTATOR: QE fearlessness

In his latest note on global markets entitled 'Cape Fear', Perpetual strategist Matt Sherwood says stock markets are likely to extend their gains even if the US Federal Reserve takes its foot off the gas in terms of injecting more money into the financial system.

If the Fed decides to curb its bond buying program to $US55 billion a month from the current $US85 billion, it will be a sign the US economy is on a sustainable path to recovery. That’s good news for stocks, says Sherwood.

He says the declining Australian dollar – which has fallen 9 per cent against the US dollar from its January peak – will ease financial pressures on companies and support the local economy.

A weak Australian dollar will be good for News Corp, Resmed and Boral as their foreign profits will be worth more in local currency terms. Mining stocks should benefit from a depreciating local currency but signs of a weaker Chinese economy and declining commodity prices are damaging earnings. Still, Sherwood likes BHP and Santos.

But the benchmark S&P/ASX200 Index’s 21 per cent gain over the last 12 months has the market trading at 14.7 times forecast earnings compared to a “leverage boom average” of 13.6 times, according to Sherwood. Forecast earnings per share growth in the 2014 financial year of 11.6 per cent may not be achievable given the economy may expand just 2.1 per cent.

“Softer domestic growth is just one of the many reasons the Reserve Bnak needs to reduce official interest rates in the near term despite the positive impact of the lower Australian dollar,” says Sherwood.

At 1452 AEST the S&P/ASX200 Index was up 16.218, or 0.33 per cent, to 4946.9. The index has declined 4.8 per cent this month.