Rumourtrage ignores basic fundamentals

Frenzied swings in the local market, which yesterday lost $65 billion before roaring back in one of the biggest one-day swings in traders' memory, are relegating reasonably healthy corporate profits to sideshow status.

"What's going on in Australia doesn't really matter - it's all revolving around the US and Europe," a UBS equity strategist, David Cassidy, said yesterday.

"The longer markets remain in panic mode, the chances of US and European recession rise by the day ... you have got a negative feedback loop between the markets and the economy," he said.

Sharemarket volatility promises to continue with rumours of big hedge funds in the US being forced to sell on margin calls and mutual funds forced to sell stocks to meet redemptions.

On the positive side, rumours circulated about possible US moves for a third round of quantitative monetary easing and of globally co-ordinated action by central banks.

"Rumourtrage" is a long way from old-fashioned judgments about fundamental values of companies based on their profits, and UBS is showing Australian companies' prices falling to a (cheap-looking) ratio of 10-times earnings.

Indicative of the volatility, Cassidy is forecasting either an improvement of 20 per cent in the S&P ASX 200 if the US has a recession or a 10 per cent to 15 per cent fall if it doesn't have a recession.

Nevertheless, Mr Cassidy is predicting a 10 per cent profit growth across companies this reporting season, albeit falling to a more anaemic 3 per cent if resources are not included.

Ironically, the US is also experiencing a bumper profit season. In a report last week, Macquarie analyst Bryan Raymond found that about 80 per cent of the way through the S&P 500 reporting season, profits were 4.4 per cent ahead of expectations, with 144 companies materially exceeding forecasts and 47 materially missing forecasts.

Alva DeVoy, an equity strategist for RBS, said yesterday Australian companies were approaching the price-earning ratios they reached at the depths of the financial crisis. But this time local companies are not saddled by high levels of pre-crisis debt, after $60 billion in capital raisings in 2008 and 2009.

"I guess our anchor is around Chinese growth," she said. "If the markets perceive the China growth trajectory is on track, we should see the resources and industrials perform well." RBS forecasts profits will rise 17.6 per cent this reporting season. But it has cut its December target for the S&P ASX 200 from 5300 to 4750, based on the uncertain market.

Mike Mangan, a fund manager with 2MG Asset Management, agreed valuations were cheap, to a point. "I would not be selling today. You look at the valuations there's a stack of stocks out there approaching 10 per cent yields," Mr Mangan said.

But the threat of global instability, shown by riots in London, threw up even greater challenges for politicians, he said. If things deteriorated, bounces in the market would be a good opportunity to cash out, Mr Mangan said.