Industry participants at the roundtable: Ausbil Dexia deputy head of equities John Grace, Schroders Investment Management Australia portfolio manager Andrew Fleming, Aberdeen Asset Management Australia head of equities Mark Daniels, Legg Mason Australian Equities head of equities Reece Birtles and Perpetual senior portfolio manager Matt Williams.
Australian stocks rebounded from the global financial crisis to post a 37 per cent gain in 2009. Can investors expect similar returns in 2010?
Grace: Similar returns I think would be an exceptional outcome. We’re forecasting somewhat of a lower return than that. Our target on the S&P/ASX 200 Index is 5250 points for June. That’s based on earnings available in the market and of course the level of economic recovery we have seen, so I would expect around a 10 per cent return this calendar year, certainly through to June, but I don’t think it’s going to be a similar run of performance that we had last year, particularly from those March lows.
Daniels: I’m sort of in the same camp, I think [we could see] very low double-digit returns. We would be very happy with a 10 per cent return for the market this year. I think the first-half results or the second half of the financial year will be quite tough for most companies. If you look at the market now, it’s probably trading on a price/earnings ratio of around about 16 times for full-year 2010, which I think is pretty expensive.
It’s had a great run. I’d love to say we’d get another 37 per cent return but I think it’s very, very unrealistic. The market I think needs to just consolidate around here for a while. So I think the first half will be tough and you might see improved earnings come through in the second half of the calendar year, which will help support the market.
Birtles: We’re in the bullish category. I don’t think bullish means 37 per cent, but if you take say normal returns of about 10 per cent for a year, then we’d say that you’d expect to get an above normal return still for calendar year 2010 and that’s because risk assets are still feeling the effects of the global financial crisis in the sense that credit spreads are still a bit wide and small caps have still underperformed large caps. So it’s a reflection of as economies recover risk aversion will decrease and that will still lead to an above normal return environment.
Williams: A bounce of similar magnitude is unlikely but I remain optimistic about the market and a rise of around 8 per cent plus dividends for the calendar year does not seem unreasonable. I base this view on an index level of around 5300 and it assumes the cyclical upturn in place experiences no hiccups from here. Obviously forecasting the market direction is fraught with danger and so we believe efforts are better directed towards picking stocks that we believe will do better than the market averages over the medium term.
What are your expectations for the upcoming reporting season? Can investors expect higher profits and dividends than at the same time last year?
Grace: In the February reporting season we’ll be looking really to see what benefit these corporates have from a pick-up in sales volumes because every company has lowered their cost of doing business [including] a lot of fixed costs. So we want to see the leverage effect start to come through across the board, particularly in industrials and some of those cyclical-type stocks. So we’ll be looking at sales volumes including margin impact and one of the keys of course will be the confidence management has with outlook comments. So I think again there’s going to be quite a dispersion across a number of sectors. There’s likely to be some disappointments and some encouragement. But on balance I think the market again is still looking through this current reporting season into the back half of this calendar year for more sales volumes to come through including their impact on profitability, which will then support earnings growth going into fiscal 2011.
Fleming: We’d broadly agree with that. You can expect higher profits and dividends from the same time last year but the issue is there will be a pretty big bifurcation. So as the markets perform there will be a fair bit of leadership going through from some of the resource names and obviously the banks would be better placed than they were 12 months ago.
Daniels: I think companies still remain pretty cautious so I’m not certain you will see some significant dividend hikes. I think people will keep their firepower if they can, so I’d probably be quite happy if they kept their dividends flat. I think the market is pricing in a dividend yield of around about 3.8-4 per cent overall for the whole market. Will the banks increase their dividends? I think they will probably keep their firepower as well. So we’d be quite happy with just similar results to last year. I think companies have been controlling their costs so you might see some margin expansion, but I think the comments from management . will remain cautious. I think it’s the August reporting season that will be more interesting and that will probably be where management may feel much more comfortable to make slightly more positive comments as to where they’re going in full-year 2011.
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