YESTERDAY'S wildly see-sawing sharemarket further obscured the reporting season, which is targeting a 14 per cent lift in profits on consensus forecasts.
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.
Frequently Asked Questions about this Article…
What is “rumourtrage” and how is it driving market volatility?
Rumourtrage refers to extreme, rumor-driven sharemarket swings rather than moves based on company fundamentals. The article says recent volatility has been fuelled by rumours of big US hedge funds being forced to sell on margin calls, mutual funds meeting redemptions, and talk of central bank action — pushing prices away from earnings-based valuations.
How is the current reporting season expected to affect company profits and investor expectations?
Consensus forecasts in the article target about a 14% lift in profits this reporting season. Analysts quoted give a range of views: UBS’s David Cassidy expects around 10% profit growth overall (falling to about 3% excluding resources), while RBS forecasts profits rising about 17.6%.
What are analysts saying about the ASX 200 outlook amid the uncertainty?
Analysts offer divergent scenarios: David Cassidy is forecasting either a 20% improvement in the S&P/ASX 200 if the US has a recession or a 10–15% fall if it doesn't. RBS has trimmed its December ASX 200 target from 5300 to 4750 because of the uncertain market environment.
Are Australian shares looking cheap right now based on price‑earnings ratios?
Yes — the article notes UBS is seeing Australian company prices fall to around 10-times earnings, levels similar to the depths of the financial crisis. Fund manager Mike Mangan also describes valuations as cheap, with some stocks approaching double-digit yields, and he cautions that companies are in a healthier position because they raised about $60 billion in 2008–09.
What global factors are most likely to influence Australian markets in the near term?
The article highlights US and European markets as primary drivers: prolonged panic there raises recession risk and creates a negative feedback loop with the economy. Chinese growth is also important — RBS says if China’s growth trajectory stays on track, resources and industrials should perform well.
Could more central bank action or quantitative easing change the market picture?
Rumours of a third round of quantitative easing in the US and possible globally coordinated central bank action circulated in the article as potential positives. Such measures could calm markets or support asset prices, but the article frames them as rumours contributing to current swings.
How did recent US company reporting seasons compare to the expectations mentioned for Australia?
Macquarie’s report, cited in the article, found that about 80% of the way through the S&P 500 reporting season, profits were 4.4% ahead of expectations. It noted 144 companies materially exceeded forecasts while 47 materially missed, indicating a generally upbeat US profit season despite market volatility.
Should everyday investors sell during these volatile swings or look for buying opportunities?
The article relays mixed views from professionals: Mike Mangan says he 'would not be selling today' and points to cheap valuations and high yields, but he also notes that if global instability worsens, market bounces could be good opportunities to cash out. In short, the article presents both a buy/hold perspective on cheap valuations and a cautionary note about using rallies to take profits if conditions deteriorate.
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