Not much to fear after all
By Not much to fear after all | domain.com.au | 07 September
Phew! If you weren't aware of the potential peril, then good for you — because it turned out to be somewhat without foundation.
We have just wrapped up probably the most eagerly anticipated and widely feared profit-reporting season for years. Sure, six months ago was bad but it was the August reports that were supposed to capture the true extent of the global economic downturn and finally reveal how bad the plight of our local companies was.
Instead, Bloomberg analysis shows 23 per cent of company results beat analyst expectations, 49 per cent matched them and only the remaining 28 per cent fell short. Yes, some 50 companies reported losses higher than $100 million, with 14 reporting losses higher than $1 billion.
But until Wall Street started getting the jitters last week, not even this seemed to faze investors. Companies that disappointed were, in many cases, rewarded for coming clean. It was as though investors didn't care if it was bad, just that they finally knew how bad.
Property and diversified financials predictably delivered the worst news. Excluding these sectors, however, CommSec analysis shows aggregate earnings fell by only 26 per cent. And despite the most challenging economic climate in decades, 64 per cent of companies actually delivered a profit.
How did the market react? It marked down only the telecommunications, utilities and materials sectors.
Meanwhile, healthcare, industrials and financials surged on the figures, helping to take the S&P/ASX 200's returns for the month to 4.5 per cent. In particular, investors breathed a sigh of relief that our banks — thanks to strong prudential regulation and the fact that our property market has bucked the international trend and held up well — actually seem to have escaped the crisis.
The sector put on an astounding 11 per cent over the month and is now 25 per cent up this year, against a gain for the overall market of 19 per cent. So is the rally — some 40 per cent since early March — overdone? More than likely.
Ordinarily, you should expect to have to wait three or so years for returns of that magnitude. And the falls seen since the reporting season last week indicate investors appreciate that fact.
The higher-than-expected gross domestic product figure and talk of the winding back of government stimulus also increase the prospect of rate rises, which tend to dampen equity returns. While the bull market made geniuses of even the most inexperienced investor as stocks rose across the board, making money on the market from here is going to come down to prudent stock picking.
This is not least because, thanks to the rally, valuations are no longer compelling — in other words, many stocks are approaching fair value. In this environment, cashed-up investors should search for stocks in a strong position for the recovery that the market has failed to fully price, whether because they have fallen out of favour or have potential that has not yet been recognised.
Bear in mind, too, that to identify such companies you will probably have to look beyond the top 200, which investors and analysts alike will have already scoured for buying opportunities.
Just keep your exposure to any one stock to a sensible level and realise that the market's relentless upwards trajectory will falter — and probably in the shorter term.
Nicole Pedersen-McKinnon is also the editor of AFR Smart Investor magazine.
First published by Domain.com.au on September 07 2009
domain.com.au the easiest way to find property
