Australian Equity Strategy Review

Submitted by Jim Thesiger on 9 May, 2008 - 16:11

Here is a review on the Australian equity strategy.The resources hit been upgraded while the rest of the market has been downgraded from Australian market analyst UBS.

Australian Equity Strategy

Earnings Revision Trends

Resources Upgraded While Rest Of Market Downgraded:

Over the last 3 months, weighted aggregate market FY08e and FY09e consensus earnings have been downgraded. However, resources have been upgraded while the rest of the market has been downgraded. Of the rest of the market, Financials have led the way down.

Aggregate FY08e Forecast EPS Growth Down To Low Single-Digits:

Currently, aggregate market bottom-up consensus EPS growth estimates are sitting at a mere +4.2% for FY08e and +15.2% for FY09e. Excluding Resources, the numbers are even lower, at 2.8% and 8.7% for FY08e & FY09e respectively. Resource sector consensus EPS growth currently sits at 8.1% & 32.7% for FY08e & FY09e respectively.

Upside Risk To Resources, Downside Risk To Industrials:

We believe there is upside risk to Resource consensus estimates and downside risk to Bank consensus estimates. Consensus numbers for industrials (ex-financials) are sitting near high single-digits/low double-digits - with domestic demand slowing, costs likely to be sticky and the A$ still high, there exists a strong likelihood that these estimates may come down significantly.

Overall Still Positive On Equities:

We believe prospects for equities in aggregate for the next 12 months are reasonable despite the prospect of downgrades to consensus earnings estimates. P/Es are quite low both locally and globally and falling risk premia (and therefore rising P/Es) should allow reasonable returns even though consensus EPS estimates both locally and globally are likely to be downgraded. Historically, equities have been able to post reasonable returns despite earnings downgrades.