A leading sharemarket analyst said to me last week he expected to downgrade earnings of Australian stocks every year for the next 10 years. At first I thought he was being polemic to shock me, but I quickly established his comments were genuinely his view
That is a stark picture to paint about the future of the local equity market. It is not uncommon for analysts to dial down earnings forecasts but to do so for a decade would be crippling. We all live in hope that sometime in the next few years the economy will snap out of its funk and battle-weary analysts will begin to upgrade earnings. Current sentiment mocks anyone who attempts to articulate this scenario.
There is no sentiment indicator for the stock market in Australia. That is remarkable given sentiment is regularly pinpointed as a powerful contrarian indicator. Baron Rothschild coined the term, "buy when there's blood running in the streets", way back in 1871. We have to ask is there enough blood in the streets today for the Baron to get out the cheque book?
In Australia have we totally capitulated? Unfortunately we have to rely heavily on flimsy indicators such as trading volumes and anecdotal straw poles to measure sentiment. Trading volumes are down about 30 per cent since peaking back in 2007.
The straw pole, though, reveals a far darker story. Heads have been rolling in the stock broking industry for two years with Macquarie Group, Royal Bank of Scotland, Bank of America and Goldman Sachs all having a turn at culling. Those remaining feel like dead men walking, with hundreds more jobs predicted to be shed before the year is out.
Dealing rooms are deathly silent because the phones have stopped ringing. In the bear market of the early 1990s sedentary brokers sharpened their crossword skills. This time they are downloading the latest gaming application on their smart phones.
Strategists in the Australian market, after years of predicting a major rebound in equities, are starting to come back to reality. Still, most are forecasting the ASX 200 index to finish the year higher than today with most predicting a climb of 10 per cent. Only one thinks it can sink 10 per cent from here. Stock analysts are still forecasting high single-digit earnings growth while professional investors think it will be closer to zero.
Expert commentators have suggested that bonds yields will stay low for many years to come. In other words there is no bubble in bonds but simply the "new normal".
It is an easy task to construct a bear case at the moment. Europe is a basket case, China continues to slow, the US has a fiscal cliff to contend with and company earnings at home are being wound back at a rapid clip. Investors have either ploughed their funds into term deposits, despite declining yields, or hidden in highly defensive equities such as health care and utilities.
So is the "blood running in the street" and do we buy? We know the blood is starting to flow but we don't know if it is going to turn into a torrent. And there lies the angst of the situation.
The Australian market is trading on about 11 times forecast earnings, which is historically cheap but still above the normal cycle low for a bear market. If earnings have to be downgraded still then prices could easily fall another 20 per cent to hit the nadir.
One of the most accurate market forecasters, Craig Scheef, of Technical Investing, believes the bottom will take place late this year. Scheef has been deadly accurate predicting the market direction using a combination of technical and fundamental analysis.
Scheef believes the US market has again started a downtrend that will be punctuated by short rallies such as the one that has taken place during June. The most likely trigger for these short upward bursts by the market is to be policy announcements about global stimulus, a drug many investors have become addicted to.
Just where the bottom is he is not sure, but it will be a precursor to a rally that kicks off in earnest in early 2013. Obviously, he believes there is not enough blood flowing yet. A conclusion that many investors and stock brokers would disagree.
This, though, could be more hope than reality.
- In last week's column I wrote that in late 2008 NAB failed to raise funding in global wholesale debt markets with the government sovereign debt. NAB refutes this happening, saying it was able to raise funds along with Australia's other major banks.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
What is the current sentiment in the Australian sharemarket?
Sentiment is weak and cautious. The article says there’s no formal sentiment indicator for Australia, trading volumes are about 30% below their 2007 peak, dealing rooms are quiet and many brokers report layoffs — all signs of low investor confidence.
Is now a good time to 'buy when there’s blood in the streets' in the ASX market?
The article suggests caution. While the Rothschild idea of buying in panic is discussed and the market is showing distress, the author notes it’s unclear whether the weakness will deepen into a torrent. The ASX is trading at roughly 11 times forecast earnings (historically cheap), but further earnings downgrades could push prices down another ~20%.
Are Australian stocks cheap right now based on valuation metrics?
By one measure they are relatively cheap: the market is trading at about 11 times forecast earnings, which the article describes as historically inexpensive. However, that multiple is still above the typical cycle low in a bear market, and renewed earnings downgrades could drive prices lower.
How reliable are sentiment and volume indicators for Australian investors?
According to the article, Australia lacks a dedicated market sentiment indicator, so investors rely on imperfect measures like trading volumes (down ~30% since 2007) and anecdotal ‘straw polls’ such as broker activity — which can be informative but are not definitive.
What are experts saying about bond yields and the 'new normal'?
The article reports commentators suggesting bond yields will remain low for many years and that this reflects a 'new normal' rather than a bond bubble. As a result, some investors have shifted into term deposits despite falling yields.
Which sectors are investors favouring for defensive exposure?
Investors are hiding in defensive equities such as health care and utilities, and some have moved money into term deposits. These sectors are mentioned in the article as typical safe havens during market weakness.
When could the market find a bottom and start to rally again?
The article cites market forecaster Craig Scheef, who believes the market bottom could arrive late this year with a more meaningful rally beginning in early 2013. He also expects the US market to be in a downtrend punctuated by short policy-driven rallies.
How has the bear market affected stockbroking firms and trading activity?
The piece notes substantial job cuts across major brokerages — Macquarie Group, Royal Bank of Scotland, Bank of America and Goldman Sachs have all reduced staff — and describes dealing rooms as 'deathly silent' with phones stopped ringing, indicating sharply reduced trading activity.
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