THE DISTILLERY: Steadying the bull

Jotters are split on whether Australia's stock market is officially in a bull cycle, with one noting loose monetary policy has inflated equities.

What are we to take from the bull market flags that are going up? The market is rallying, but central banks are easing the world over and there’s a total absence of earnings growth expectations in the Australian market. This morning The Distillery has some offerings from the nation’s business commentators on the direction of the stock market, plus some tips on what to expect from the Reserve Bank of Australia tomorrow.

Fairfax’s Adele Ferguson and Mark Hawthorne team up to address the question head-on in what was perhaps the business feature of the weekend.

"With most of the world economies still basketcases, China's economy slowing and Australia battling its own problems including the uncertainties associated with an impending federal election, the experts are divided. Has the global equities market officially entered a bull cycle or is it illusory? Craig Drummond, the chief executive and country head of Bank of America Merrill Lynch, Perpetual's head of equities, Matt Williams, Tyndall's head of equities, Bob Munster, Deutsche Bank's Scott Mailer, and others believe the rally isn't a false start, but a clear shift in the cycle. Indeed, Craig James at CommSec revised his end-of-year forecasts for the Australian sharemarket to close at 5300, up 14 per cent.”

Fairfax’s Michael West passes on research from Goldman Sachs that explains how equity prices tend to increase during periods of loose monetary policy, like the conditions we’re experiencing now. Might this explain why the stock market is in bull market territory when there’s no earnings growth potential? Why yes it might.

The Australian’s John Durie hits similar themes in his piece that questions the foundation of the latest stock market rally – although everyone seems to be in agreement that it’s not based on earnings expectations.

"A wall of money looking for a home is driving stock prices, which is pushing valuations to levels in excess of reality. But fund managers are buying just to keep up with the game. A case in point is Aristocrat, currently trading at $3.78 a share, up 1.6 per cent today (Friday) and at hefty price-earnings multiple of 20 times based not on its forecast profit but the $1.5 billion takeover last night of US gaming machine maker WMS industries by Scientific Games Corp. That deal, at a 59 per cent premium, has automatically flowed through to the Australian stock market.”

Fairfax’s economics correspondent Peter Martin expects the Reserve Bank of Australia to hold fire on the next rate cut for the moment. You can safely think that The Australian’s economics editor David Uren is somewhat like minded.

"The bank considered that rates were at a neutral level in December 2011, and it has cut its cash rate by 1.25 percentage points since then. Although there has been some expansion in the spread between the cash rate and lending rates, the Reserve Bank would believe it has strongly stimulated the system, which is yet to show its full effect. The hurdle for further rate cuts is higher, as a result. The data that will be laid before the Reserve Bank board tomorrow will not make the case for making that leap. However, most of the concerns that led to the bank moving rates so low are still there, and it is premature to conclude, as have a number of market economists, that the easing cycle is over.”

Meanwhile, Fairfax’s Ross Gittins continues his economics lessons with the argument that voters will tend to believe the economy is doing well or poorly depending on which party they’ve aligned themselves with.

"But there's another part of the explanation: the public's inability to distinguish between cyclical and structural factors. Most of the bad news we heard last year was structural in nature, meaning it changed the shape of the economy rather than its overall size, adversely affecting some parts but favourably affecting others and having little effect on most. But such analysis is too subtle for most punters. To them, all news is cyclical: good news means the economy's on the up and up; bad news means it's going down and downer.”

Still in economics, The Australian Financial Review’s economics editor Alan Mitchell acknowledges that China has some significant structural problems facing its long-term economic outlook. But he also argues that the emerging economic behemoth started a long way behind other countries that have since become trapped at the end of the manufacturing booms.

The Red Kingdom has some big, relatively easy productivity gains to make before the day of reckoning, where innovation must take over, is upon them.

In resources, The Australian’s Robin Bromby has some research from BNP Paribas precious metals analyst Laure Tremblay that says the one to look out for in 2013 is palladium.

Meanwhile, in company news, Fairfax’s Michael West says the "enforceable undertakings” that Macquarie Group has negotiated with the Australian Securities and Investments Commissions is actually a big deal. It’s non-compliance, people!

The Australian’s Richard Gluyas has a terrific profile piece on Macmahon Holdings chief executive Ross Carroll, who had what can only be described as a baptism of fire when the construction accounts started blowing up in front of his face when he was still only in an acting capacity.

And finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd is using a list from Australian Super chief investment officer Mark Delaney to frame an occasionally refreshed assessment of how Australia’s fund managers are going.


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