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Markets
Volatile Aussie shares to deliver 10% this year
May 05, 2008
Brendon Lau, ShareAnalysis
There is some good news for battle-weary investors. Based on the top-down analysis from our strategy team, the S&P/ASX 200 accumulation index is likely to deliver total returns of close to 10% over the next 12-months. While the gain may sound modest, it compares very favourably to major international peers, especially the US.
But as we have warned previously, the next 12 months will be anything but a smooth ride, as our share market continues to be torn between significant counter-balancing economic forces. Although the Reserve Bank of Australia may stop hiking interest rates for now, interest rates are at a 13-year high of 7.25%, and this is having a slowing impact on small- to medium-sized businesses, consumers and homeowners. Furthermore, spreads in global credit markets have widened further over recent weeks, creating a credit squeeze in some sectors.
Many financial institutions who have relied upon securitisation and sourcing of wholesale funds from the global bond market are now under high financial stress as debt funding either becomes unattainable or is available at a significantly higher funding cost than previously.
State governments are also feeling the squeeze and there are reports that major infrastructure projects may be put on hold. This would be a major blow to construction and engineering companies.
However, any remark about the Australian economy being dragged into a recession with the US is pure sensationalism. Not only is there no evidence of this, but also recent data indicates our economy should continue to expand (albeit at a slower pace), thanks largely to the voracious appetite of emerging economies for our hard and soft commodities. Many of these commodities are trading near or at record-high prices.
Back on our markets, ongoing market volatility continues to create a "mood" of caution amongst investors until a "settling of the dust" emerges in global markets, which may take several months. Sectors and companies exhibiting a high degree of gearing, low interest cover, a largish proportion of current debt to non-current debt and involvement in industries sensitive to the level of global economic growth remain susceptible to continued negative market sentiment and earnings revision downgrades. Companies with a high degree of their business centred in the US also remain vulnerable to reduced profitability.
Due to these factors, we have adjusted our market risk premium from 5.5% to 6.0% to reflect the heightened risk aversion clearly shown by investors currently. Day-to-day volatility in equity markets and intraday sector-to-sector volatility are further creating a difficult environment for investors to confidently make and implement decisions, and hence a higher risk-adjusted return is being sought to compensate for this uncertainty and volatility. The adjustment in our risk premium has led us to cut our price targets on a wide range of stocks across every sector.
Finally, investors need to be mindful of the "apparent" low forecast P/E ratings of some sectors where share-price declines in recent months have led the downward earnings revision cycle, with further earnings downgrades envisaged over the next 12 months.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
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Carbon Trading: The Carbon Market – The Essential Guide Part 2
Stocks: Stock of the week – Otto Energy
Markets: Volatile Aussie shares to deliver 10% this year
Companies: Optus, Telstra bicker over broadband bid
Companies: BHP to lodge Rio Tinto bid with EC
Stocks: Junior iron ore stock prices skyrocket
Companies: Failed Chartwell head expecting charges
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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