ASX 200 went nowhere over the past week, falling 0.39%.
I read a fair bit of market-related content throughout any given week, and at the moment, I’m struggling to find a valid reason not to want to participate/buy shares at the current prices. I can, like most of the commentators, ‘explain’ what’s happened with a bunch of geopolitical or macroeconomic uncertainties however the actual effect beyond “negative sentiment”, is difficult to quantify.
Some examples include:
- US-China Trade Relations
- China Economy – High levels of indebtedness, a lack of transparency on size/scale.
- Oil prices falling by 30% this quarter
- Australian residential property price
- Brexit / British politics
- The Fed – the speed of rate rises relative to inflation
- Earnings growth
As you know, I put a lot of emphasis on knowing what I don’t know, understanding the limitations of my capability and avoiding, to quote Charlie Murphy, ‘line-stepping’.
Oil prices; Brexit / Theresa May; The Fed; What the Chinese Govt is up to; What Trump will tweet next. The chances of me (or anyone else for that matter) repeatably and accurately forecasting the outcomes of these uncertainties is low.
The only real thing that we can put some numbers around are property prices and earnings forecasts. Property prices are pretty simple from my perspective, we’ve talked about it a lot over the past three years, and regular readers know it’s a function of real incomes, credit availability (banks willingness to lend), credit pricing (interest rates).
Back onto the stock market, we know that share prices follow earnings estimates. Below is the year on year change in forward earnings estimates and the year on year change in the ASX 200 index price over 15 years.
And the piece I’m interested in is the last six months, where there’s been a distinct gap open up between earnings and prices. Prices have declined 4.5% y.o.y. whilst earnings growth has only slowed, from over 8% to more like 6% currently.
When we look at the makeup of this differential, we can see that resources earnings growth forecasts are lower, particularly when we exclude oil.
This raises an interesting question, are oil stocks come significant downgrades given the recent decline in oil prices? Energy stock earnings have barely moved, though share prices have followed the raw commodity lower, with the sector down 15% (Woodside the best, -6%, Origin the worst, -33%.)
Commodity price forecast reviews will probably go down in January at the big investment banks which should result in some analyst revisions. Current consensus on Factset is US$65.53, and that’s with highs of $77 and lows of $58.
But back to earnings for a sec. Industrial companies excluding banks are catching upgrades since the middle of September. So while analysts aren’t as bullish as they were, things are looking up in my view.
And I’m not the only one. Last week Citi’s Australia strategist Tony Brennan expressed his views that this is a buying opportunity, citing a below medium-term average PE, reasonable economic growth and conservative earnings estimates.
Citi sees the ASX 200 at 6500 next year with the current price to book valuations supporting of above-trend returns in the coming years.
That’s probably enough pretty pictures for one day. But you get the idea. While there is plenty to worry about, and the earnings outlook isn’t as strong, it’s still relatively good, and with the recent pullback, valuations are significantly more attractive and statistically more likely to produce above-trend returns in the future.
Movers & Shakers
I was going to run a few stock screens for you to show you what to buy, but I think I’ll do that next week as I’m running out of time. Nice to see the banks on the bounce.
Fund manager favourites are taking plenty of hits. I’ll give you a hot tip into the analysis we started today – Ooh! Media (OML) screening well at these prices, as does Worley (WOR), which coincidentally, Karl Seigling from Cadence Capital (ASX: CDM) just mentioned in a podcast we just recorded. You can catch that here, as well as on Spotify, iTunes and just about every other Podcast app you could think of.
Speaking of the podcast, we also recently had Stephen Arnold from Aoris Investment Management on for a chat. You can get that bad boy here!
Have a good week,