Shares to fall short of forecast

THE Australian sharemarket will close the calendar year lower than forecast and a group of high-profile companies is preparing to ask investors for cash injections, Deutsche Bank said in a new report.

By InvestSMART · 27 Jun 2012

By InvestSMART ·
27 Jun 2012

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The report, by strategists Tim Baker and David Jennings, said the S&P/ASX200 would close at 4350 points by the end of 2012, compared with the bank's previous target of 4700 points, and will edge up to 4650 by the middle of next year.

The benchmark index closed flat at 4013.3 yesterday.

The predicted rise is driven by forecast earnings growth over the next one to two years, underpinned by Chinese demand for commodities and an improvement in conditions for industrial companies, the report said.

It listed a number of companies including Myer, Seven West Media, Leighton Holdings and OneSteel as stocks that could look at raising equity amid "challenging" conditions.

Conversely, the report is bullish on the financial services company Challenger, Primary Health Care, funds manager AMP, property group Lend Lease and casino company Crown, rating each a "buy".

"Earnings growth [for the 2011-12 financial year] is expected to be essentially flat for the market as a whole, and across each of the major sectors (resources, banks and industrials)," the report said.

"We do anticipate further downgrades, but nonetheless expect some earnings growth in the next 1-2 years, which should lift markets. China leading indicators are positive which should assist commodity prices. And industrials have been plagued by a variety of challenges which should ease (rising AUD, natural disasters, record low food inflation). In sum, there has been more breadth in this downgrade cycle than depth."

A note to clients from Joseph Palmer & Sons said that there was "some light appearing at the end of the American tunnel". "With interest rates in most developed Western economies low, stock prices similarly so and many companies increasing their dividends, it is worth investors directing funds to selective higher-yielding companies in the Australian stockmarket," it said.

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Frequently Asked Questions about this Article…

What is Deutsche Bank's ASX200 forecast for the end of 2012 and the middle of next year?

Deutsche Bank's report forecasted the S&P/ASX200 would close at 4,350 points by the end of 2012 (down from its prior target of 4,700) and then rise to about 4,650 points by the middle of the following year. The benchmark had closed flat at 4,013.3 on the day of the report.

Why does Deutsche Bank expect the Australian sharemarket to finish the year lower than previously forecast?

The bank pointed to essentially flat earnings growth for 2011–12 across the market and major sectors, a broad downgrade cycle and challenging conditions for some companies. While it expects further downgrades, Deutsche Bank still sees some earnings growth over the next 1–2 years that could lift markets.

Which companies did the report say might look at raising equity capital?

The report listed Myer, Seven West Media, Leighton Holdings and OneSteel as examples of stocks that could consider raising equity amid challenging operating and funding conditions.

Which stocks did Deutsche Bank rate as 'buy' in the report?

Deutsche Bank was bullish on Challenger, Primary Health Care, AMP, Lend Lease and Crown, rating each of those companies a 'buy' in the report.

What does 'earnings growth essentially flat for 2011–12' mean for everyday investors?

It means the report expected little or no overall profit growth for companies in the 2011–12 financial year across resources, banks and industrials. For investors, that suggests limited near-term upside from earnings, though the report still anticipated some recovery in earnings over the next 1–2 years.

How important is Chinese demand to the Australian market outlook and commodity prices?

Deutsche Bank highlighted Chinese demand for commodities as a key underpinning of the forecasted earnings recovery. Positive Chinese leading indicators were cited as likely to support commodity prices, which can help lift earnings for resource-linked Australian companies.

What challenges have industrial companies faced and why could conditions improve?

The report said industrials had been hit by factors such as a rising Australian dollar, natural disasters and unusually low food inflation. Deutsche Bank expects many of those pressures to ease, which should help industrial sector conditions.

Should income-seeking investors consider higher-yielding Australian shares given the current outlook?

A note referenced in the article from Joseph Palmer & Sons suggested that with low interest rates in developed economies and many companies increasing dividends, investors may want to consider directing funds to selective higher-yielding Australian stocks. The emphasis is on being selective rather than a broad shift into yield plays.