Rudi's View | Apr 22 2021
This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC
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.
But maybe any conclusions drawn from this observation risk being too simplistic? In Australia, the ASX20 makes up more than half of the share market in terms of index weightings, and thus more consideration needs to be given to the specific context surrounding CSL ((CSL)), CommBank ((CBA)), BHP, et al.
Spoiler alert: the numbers for the Top20 in Australia look a lot less promising. FNArena's website shows all major local indices, including price targets for index constituents. Check out the ASX20 here: https://www.fnarena.com/index/ASX20/
It is easy to establish the Top20 of Australia's large cap market leaders is split in two with half of the stocks above or very near the target, while the other half contains market laggards such as Brambles ((BXB)), Coles ((COL)), and CSL for which market enthusiasm is lacking to push share prices a lot higher in the short term.
Admittedly, Rio Tinto and Westpac are still trading below target, as are Goodman Group ((GMG)), Newcrest Mining ((NCM)), Telstra ((TLS)), Woolworths ((WOW)) and Woodside Petroleum ((WPL)) but in many cases one or two days of further gains can push the majority of the still-below half over to the opposite side.
So there certainly seems to be a case to be made in that the Australian share market is flirting with a lot of optimism and positive projections, with share prices of market leaders largely reflecting such positivism, but it's far from an excessive bubble, as some critics would label it.
Investors should not dismiss the fact that forecasts can still increase, which would push up valuations and price targets too. And did I mention dividends? Many an expert remains convinced current dividend forecasts remain too low, which would only add more fuel to the anticipation of additional valuation-upside ahead.
The Australian share market has been supported by rising forecasts for seven consecutive months, but market strategists at Macquarie, among others, still predict more upgrades lay ahead. On their estimates, forecast earnings have risen 23% from the low in August last year. Macquarie thinks earnings estimates can potentially rise another 15-20% over the year ahead.
It would make the current upgrade cycle for the Australian share market the strongest in many decades; much stronger than at any time during the Supercycle Commodity Boom. And it's not already priced in, say the strategists. They single out Woodside Petroleum, Nine Entertainment ((NEC)), South32 ((S32)), Reliance Worldwide ((RWC)) and Woolworths as Top100 companies for which market forecasts appear too conservative.
Equally important: if Macquarie's positive projections for the economic recovery ahead prove accurate, there remains potential for further hefty increases to current market forecasts for companies outside the Top100, in particular for the cyclical parts of the market, as well as for those sectors that have been negatively impacted by the pandemic, including the banks, energy companies and insurers.
In conclusion: while the Australian share market is by no means "cheap", there is ongoing expectation that current forecasts and projections are under-estimating the economic recovery that lays ahead for the second half of 2021, and into next year. This implies the share market is not yet priced for perfection and should have more upside left. Of course, it goes without saying that were the trajectory of this economic recovery to change for the worse, this can potentially have a major impact on share prices priced for ongoing potential.
In the short term, the local Top20 can potentially run into valuation constraints, but a lot depends on the upcoming financial results from the banks. Anticipation is building. On the other hand, with no less than 220 stocks (of the 420) still trading at least -5% below consensus target, and more than 200 stocks -8% below and more, it should surprise no one if investor attention increasingly shifts to smaller cap opportunities.
In terms of the indicators mentioned, I believe both the banks and consensus price targets in a broad sense are signalling a lot of optimism has been priced in, but share prices remain supported by anticipation of further upgrades, which might well prove crucial for the trajectory of equities over the remainder of the year, with varying degrees of polarisation included.
The big difference between 2011 and today is that market forecasts are in support of ongoing optimism, though further upgrades will be required to keep the momentum positive.
FNArena has freshly uploaded the latest update for the Australian Super Stock Report, which includes the ability to compare share prices against consensus targets:
Further research that can be downloaded without the required access to the website:
-IIR's biotech newsletter for March: https://www.fnarena.com/downloadfile.php?p=w&n=192A8D37-B758-4FB3-12A9A9371B8B2E3E
-IIR's biotech newsletter for April: https://www.fnarena.com/downloadfile.php?p=w&n=192608A5-D3F6-1280-44313D2B2F20F96D
(This story was written on Monday 19th April, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: email@example.com or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/
For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED
For more info SHARE ANALYSIS: AMX - AEROMETREX LIMITED
For more info SHARE ANALYSIS: ANZ - AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED
For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED
For more info SHARE ANALYSIS: DXS - DEXUS
For more info SHARE ANALYSIS: EHE - ESTIA HEALTH LIMITED
For more info SHARE ANALYSIS: ELO - ELMO SOFTWARE LIMITED
For more info SHARE ANALYSIS: GMG - GOODMAN GROUP
For more info SHARE ANALYSIS: HUB - HUB24 LIMITED
For more info SHARE ANALYSIS: MYX - MAYNE PHARMA GROUP LIMITED
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED
For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED
For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED
For more info SHARE ANALYSIS: PRN - PERENTI GLOBAL LIMITED
For more info SHARE ANALYSIS: REA - REA GROUP LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: RWC - RELIANCE WORLDWIDE CORP. LIMITED
For more info SHARE ANALYSIS: S32 - SOUTH32 LIMITED
For more info SHARE ANALYSIS: SO4 - SALT LAKE POTASH LIMITED
For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED
For more info SHARE ANALYSIS: WPL - WOODSIDE PETROLEUM LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED