Australian Investment Blog

Do we remain bullish as the ASX200 struggles on the global stage?

At the start of 2016, one of our forecasts was that the ASX200 would outperform its US equivalent, the S&P500 for the first time in a decade. The foundation of this view was our predicted rebound for the resources sector which has materialised, but alas, the rest of our market has not yet come to the party. To-date for this calendar year, the ASX200 is +3.2%, while the S&P500 is +6.6%.

There are times when our market feels even worse than this simple comparison e.g. the ASX200 has corrected 2.5% from its recent high while the S&P500 is only 0.4% below its all-time high. Unfortunately, we currently seem to be adopting the cliché "if in doubt, sell" to a far greater extent than our American friends - a stronger economy may be the simple explanation.

The doomsday merchants have been more vocal this year than we can ever remember, often telling people to sell all their shares and switch to cash. We continue to believe that these bears are simply too early and US stocks still have another +6% upside. The volatility index may be under 15% for the longest period in over the last 2 years, but that is no indication of an imminent collapse. Valuations are rich, but not excessive, especially when we consider the incredibly low-interest rates environment.

The S&P is currently trading on 16.9x forward earnings, while the average of the last 20 years is 16.5x, hence implying only a 2-3% correction on value. Earnings need to disappoint going forward to make valuations a huge negative.

US S&P500 Monthly Chart



US corporate profitability is certainly a risk to the US stock market, with the most recent quarters showing corporate profitability has been declining, if this continues and interest rates are raised stocks should come under pressure. Over recent years, companies have been a binge of cost reduction as opposed to CAPEX (capital expenditure), hence they need to change gears fast to increase profits in a meaningful manner. The rhetoric from most companies at present is things are getting tougher, not easier, hence we believe this is a very important area to watch moving forward.

US Corporate Profitability Monthly Chart



Last night, the US banking Index made fresh 7-month highs and as we have been discussing, we remain bullish banks short-term, looking for them to outperform for the balance of 2016 – theoretically, a solid sign for the ASX200 which is highly correlated to the banking index.

S&P500 Banking Index Monthly Chart



Yesterday, the ASX200 was thumped 46-points, but it felt more through as lack of buying than aggressive selling - this would make sense after the large placements of Crown (CWN) and Evolution Mining (EVN).

We remain short-term positive the local market, while the 5400 area holds.

ASX 200 Daily Chart

Summary
No change to our overall short-term bullish view, but a few important points to highlight:
1. Many US Indices like the S&P500, have made the fresh all-time highs we were predicting for 2016, but ideally the other will play catch-up e.g. NYSE Composite Index.
2. While we still see ~6% upside in US stocks, our bigger picture view is negative, hence we will continue to be looking to reduce equity exposure into strength.
3. On current relative performance numbers, if the US can rally another 6% we may be lucky to seed the ASX200 reach 5650.
4. Short-term we feel the banking sector should perform well following the US.

Overnight Market Matters Wrap

• The US Share markets started the week in the green, as the reported consumer spending reignited investors’ anticipation for an interest rate rise by the end of this year.
• The Dow closed 108 points higher (+0.6%) at 18,503, while the broader S&P 500 closed 11 points higher (+0.5%) at 2,180.
• Oil continues to play snakes and ladders, falling 1.4% overnight to US$46.98/bbl. while Gold futures brought some of its lustre back, up $1.40 to US$1,322.90/oz.

• The September SPI Futures is indicating the ASX 200 to rise this morning and test the 5,490 area.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 30/08/2016. 9:00AM.

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