Rally on sharemarkets may have run out of steam, says Argo
On Monday Argo reported a net profit of $86.28 million for the half year to December 31, up slightly from $85.76 million. Total investment returns from its portfolio of stocks were 16.3 per cent.
Argo's chief executive, Jason Beddow, said while Australian stocks were relatively good value for long-term investors, there were questions over company earnings.
"In general we do not expect strong earnings growth from companies over the coming 12 months, which is likely to lead to only modest dividend growth," Mr Beddow said.
He said company revenues were not growing, consumer spending was fairly soft, and the Australian dollar was staying high. Another couple of interest rate cuts would probably not be enough to drive the currency materially lower. With little revenue growth, companies were likely to boost earnings by cutting costs.
Investors may have probably already seen the best rise in share prices, at least until earnings growth regains some strength, which may be in the 2014 financial year.
Mr Beddow said the market rally was not based on earnings growth but more on what had not happened: a US recession, a hard (economic) landing in China or European economic disaster. "None of those happened. The market was possibly a little pessimistic and recovered from that and kept going with it."
Mr Beddow said the market was unlikely to reach any extraordinary heights in the near term.
"If the (Australian) market consolidates around this level, at around 5000 points or plus or minus a couple of per cent, that's probably a pretty good rebound for the next six to nine months."
Argo maintained its interim dividend at 13¢, fully franked.
Frequently Asked Questions about this Article…
Argo reported a net profit of $86.28 million for the half year to December 31, up slightly from $85.76 million a year earlier. Its total investment returns from its portfolio of stocks were 16.3%, and the company maintained an interim dividend of 13 cents per share, fully franked.
Argo's CEO Jason Beddow said the rally was not driven by strong earnings growth but by the absence of feared events (like a US recession, a hard landing in China or a European disaster). With company revenues broadly not growing and earnings likely to remain modest, Argo suggests investors may have already seen the best rise in share prices until earnings recover.
Argo does not expect strong earnings growth from companies over the coming 12 months, which is likely to lead to only modest dividend growth. The firm noted companies may rely more on cost cutting than revenue growth to lift earnings in the near term.
Argo points to weak revenue growth, fairly soft consumer spending and a persistently high Australian dollar as key constraints. The company also noted that a couple more interest rate cuts would probably not be enough to push the currency materially lower.
Jason Beddow said the market rally was largely a recovery from earlier pessimism after expected negative events did not materialise — namely a US recession, a hard economic landing in China or a major European economic disaster — rather than being supported by improving earnings.
Yes. Argo suggested the market could consolidate around the 5,000-point level on the ASX (plus or minus a couple of percent), which it described as a reasonable rebound for the next six to nine months.
Argo said Australian stocks remain relatively good value for long-term investors, but because near-term earnings growth looks modest, investors should temper expectations for large capital gains or strong dividend growth until earnings pick up — potentially in the 2014 financial year, according to the article.
Argo maintained its interim dividend at 13 cents per share, fully franked. For income-focused investors, that signals the company is sustaining its current payout level despite modest near-term earnings prospects, though Argo warned dividend growth is likely to be only modest while earnings remain subdued.
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