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(May-2004) Rally should continue throughout year
Following the strong rally in the Australian sharemarket since March 2003, investment manager Ausbil Dexia sees opportunity for further performance for investors over 2004.
The Australian equities market has experienced another strong reporting season, with overall earnings having grown by nearly 18 per cent in calendar 2003 compared with expectations of around 15 per cent growth 12 months ago.
Ausbil’s data suggests further earnings growth of 11 per cent for the 2004 financial year plus 12 per cent for 2005, which represents a considerable upward revision by the market on previous views. The main factor driving these revisions has been the financial strength of ASX listed companies and significant commodity price improvements — in particular, the oil price.
The outlook for 2004 is for modest declines in residential construction based on a slowing of mortgage finance approvals and falling auction clearance rates.
History has shown that a decline in residential construction has led to a slowing in consumer spending. So while the economy is expected to grow at, or slightly above, its trend rate of 3.75 per cent, the drivers of this growth will migrate from residential construction and consumer spending to commodity exports and infrastructure construction — providing a more balanced and more sustainable mix of growth.
Ausbil believes the Australian dollar’s rate of appreciation has run out of steam. Faced with a tighter US fiscal policy, a peak in the US current account deficit and less flattering valuations, the pull-back in the AUD will be driven by improvements in US imbalances rather than any deterioration within Australia.
The above translates to a number of themes which Ausbil believes will dominate performance over the coming year.
The major story for 2004 will be a rotation away from domestic sources of growth towards export growth. Domestic-oriented sectors such as building materials, banks and other interest sensitive sectors should suffer in relative terms, while the resources, energy and media sectors and other globally exposed sectors should benefit.
Similarly, a rebound in the earnings outlook for health care, commercial services and paper companies should see them enjoy a market re-rating.
Ausbil sees particular strength in cheaply priced growth stocks. The rebound in Australian GDP growth (particularly consumer spending) from mid-2003 saw companies leveraged to discretionary spending — such as retailers and domestic media — enjoy considerable windfall gains.
Recent rate rises and the prospect of further hikes are, however, likely to temper consumer domestic spending in 2004, particularly given the high level of consumer debt.
With such pressures on consumption and the housing market, earnings spread and certainty are expected to be in focus. Retailers, construction materials and even LPTs will experience uncertain earnings growth while telecommunications and banks are likely to suffer under an increasingly competitive environment.
There is a small risk to this view — the upcoming Federal budget. Given that the Government is not ranking well in the polls an “election budget” is considered highly likely. Should there be significant personal income tax cuts, consumer spending could remain stronger for longer.
— Paul Xiradis is head of equities at Ausbil Dexia
The Australian market remains inexpensive on most valuation measures. The earnings/bond yield ratio, the “Rule of 20” and the grossed up running yield exceeding the prevailing cash rate all point to a positive time ahead. By the end of this year, Ausbil’s target level for the S&P/ASX 300 is 3550 — implying a total return of 11.5 per cent for the 2004 calendar year.
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