Rudi's View | Apr 22 2021
More Upgrades, More Potential For Aussie Shares
By Rudi Filapek-Vandyck, Editor FNArena
Back in early 2011, something odd was happening in the Australian share market. Equity strategists at investment banks and stockbrokerages domestically were predicting strong gains ahead for the Australian share market, at that time eyeing the 5000 level, but instead the index dropped towards 4000.
What caught my attention in early 2011 was that the bullishness expressed through strategist projections and forecasts was not supported by forecasts made by analysts who covered sectors and individual companies.
As it was, those forecasts were a lot less optimistic and as things developed, the lack of further upside as expressed through individual, bottom-up valuations and price targets proved more accurate.
The ASX200 didn't break above 5000 until early 2013; a mere two years later.
I wrote a detailed analysis about it on 4 April 2011, titled How Much Upside Is There?
The reason why I am bringing this up again today is because the local share market is once again characterised by a similar large gap, only this time the roles have reversed. Many voices are reassuring investors the share market is over-heating and poised for a retreat, but this is not what is being reflected in analysts' forecasts and valuations.
Time for a deeper dive into the finer details.
The Banks Market Sentiment Indicator
...but first, let's catch up on my personal market sentiment indicator; the gap between share prices of Australia's Big Four banks and consensus price targets as set by the seven stockbrokers monitored daily by FNArena.
On March 15, I dedicated Weekly Insights to the fact Australian banks shares were trading at or near consensus targets and, assuming my old indicator is back and can be relied upon, this should act as a warning signal; maybe market sentiment is running too hot in the short term?
In a market that is as polarised as most of us have ever witnessed, the ultimate question remains whether this market indicator still applies for the share market in general terms, or whether it now reflects this year's Value and reflation trade? Or maybe nowadays it simply applies specifically to the local banking sector?
The same questions need to be asked for all indicators that can be used to gauge over-excitement and bullish exuberance. Today's is not our grandfather's share market and many calls for a sharp retreat in equity prices have remained unanswered in recent times, often to the detriment of those who got scared off and retreated to the sidelines.
Since mid-March, the ASX200 has added approximately 300 points, pushing the index above 7000 but equally important, the banks are still trading around the same 'peak' levels as they were about one month ago, with exception of the sector laggard. Westpac ((WBC)) shares had temporarily peaked just under $25 in March and they have used the subsequent pullback and recovery to rally above $25.
This is typical behaviour for a sector that is pushing against a valuation ceiling. The Big Question, of course, remains whether the upcoming results season for the banks will deliver increased forecasts and higher valuations.
Regional lender Bank of Queensland ((BOQ)) has already reported and if its performance can be relied upon for three of the Majors -ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac- then the banks are cum further upgrades once interim performances have been released and dividend forecasts have been adjusted further upwards.
The consensus price target for Bank of Queensland lifted to $9.82 from $9.23 following the interim release, up 6.4%, but the shares are still trading below the near-$9.50 level from late February. Given I am hardly inventing the wheel here, it's probably fair to assume investors are anticipating more positive news from the local banks, and this is reflected in today's share prices.
Savvy investors know forecasts and valuations (price targets) should never be treated as set in stone. One positive announcement might be enough to revive upward momentum. Of course, the same goes for a disappointing market update in the opposite direction.
Irrespectively, the observation stands that the Australian share market has made further gains over the month past and banks have not been the key contributor. Consider, for example, REA Group ((REA)) shares rallied from circa $133 to just below $160 for a gain of 20% during that time. Shares in Xero ((XRO)) bottomed around $105 and they are now trading above $146; a difference of 39%!
But it has not been solely about the come-back of Quality and structural growth. BHP Group ((BHP)) shares sold off early in March after having finally conquered the $50 mark; they subsequently bottomed at $44.50 and are now back at $47.50. Rio Tinto ((RIO)) shares sold off from $128.50, reversed direction at $107 and are now trading around $120.
It is my personal view that equity markets have not experienced a serious pullback because a heavily bifurcated market allowed the pendulum of short term momentum to swing from Value and cyclicals into Growth and Quality, and back and forth on multiple occasions. Now that bond markets are laying low, at least for the time being, stocks including Aristocrat Leisure ((ALL)), Bapcor ((BAP)), NextDC ((NXT)), Hub24 ((HUB)), and many others are steadfastly narrowing the gap with consensus targets.
This might indicate that while the Banks Market Sentiment Indicator was previously mostly a reflection of the sector and this year's Value trade broadly, it might yet become a weather vane for the broader market. Maybe once we're past the interim results?
(Assuming the market doesn't segregate itself again and starts swinging the pendulum instead).
Consensus Price Targets: The Market's Second Opinion
Whereas the banks indicator fails to provide us with a conclusive outcome, most share price targets for ASX-listed stocks are still above today's share prices, in some cases up to 60% and more; although stocks like Perenti Global ((PRN)), Elmo Software ((ELO)), Salt Lake Potash ((SO4)) and Aerometrex ((AMX)) can never be treated as a proxy for the broader market overall (their heavy discounts might indicate serious problems ahead).
The FNArena stockbroker research universe of ASX listed companies consists presently of 420 entities. Of those, only 104 are trading above target, including Mayne Pharma ((MYX)), Estia Health ((EHE)), Domino's Pizza ((DMP)) and Dexus Property ((DXS)). In other words: more than 300 share prices under coverage -three quarters of the total- still have a gap to fill.