Australian Market Commentary

Submitted by Share Trading on 14 April, 2008 - 10:03

Commentary about the Australian market from equities markets analyst Macquarie Research.

Is the Aussie Market Proving Resourceful?

The changing landscape of the Australian Equities market over the last 4 – 6 months has had a significant impact on future earnings prospects for many of its constituents. Macquarie Research Equities (MRE), in their assessment of the market’s risk and appeal, have updated their view on a number of key market fundamentals – namely EPSg and valuations. At this stage the market remains at the mercy of corporate earnings as the bellwether of sub-prime impacts, not to mention the increasing cost of lending. What factors, therefore, should one focus on when selecting stocks in this environment?

Australian Market Current Market Impacts

MRE firmly believe that investor focus should remain on earnings certainty. Operating leverage is likely to also see EBIT margins under pressure, not currently anticipated it seems in the Australian industrial sector. The strength of commodity prices have appeared somewhat resilient and nullified the earnings risk for resource stocks, albeit only to an extent.

Australian Market Analysis

MRE feel that the Australian market is at a major inflexion point; the local economy is easing and general operating costs for firms are rising. Subsequently, operating margins for firms will deteriorate for the majority of firms. And adding to this the increasing cost of debt it is evident that the outlook for Aussie companies is tough one.

MRE believe that balance sheet strength, earnings certainty and asset backing will prove to be dominant rating factors until consensus earnings adjust. This is where the industrial sector seemingly stands above other areas of the market. MRE indicate that resource sector EPSg forecasts for FY08 and FY09 currently stand at 2.5% and 57.6% respectively. The strength of base metals and beneficial contract negotiations of the coal and iron ore price have lifted the sector’s FY09 EPSg estimates by over 20ppt to aforementioned level.

Finally, it is important to note that MRE do acknowledge that the industrial sector faces ongoing cost pressures – i.e. wages, services and inputs – and volume delivery risk in the coming year. However, the earnings risks in the short term are limited compared to the rest of the market. The market is likely to remain quite temperamental until some clarity in earnings returns.

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