Sharemarket lifts as dark clouds dissipate

A stellar start to 2013…the S&P/ASX 200 has lifted by 8.3 per cent in the first 48 days of 2013.

• If the sharemarket keeps up this pace, it will rise by 67 per cent over the full year – exceedingly unlikely. At the same point in 2012, the ASX 200 had lifted by 4.9 per cent.
• Since September last year around $200 billion has been added to the value of listed shares (market capitalisation).
• US sharemarkets also produce solid gains. The broad S&P 500 index in the US has risen by 6.6 per cent so far in 2013, slightly behind gains of 6.8 per cent at the same point in 2012.

What does it all mean?

• When the sharemarket is falling, investors get worried. And when the sharemarket is going gangbusters, investors get worried. And at present it is the latter situation. With the year just 48 days old, the Aussie sharemarket has lifted 8.3 per cent – translating to annualised gains of 67 per cent.
• It is highly unlikely that gains of this magnitude will be realised. From here, the market will undoubtedly have some setbacks or face a period of consolidation. But for now, it is the absence of bad news and shift of funds from cash to other asset classes like shares and property that is holding sway. Sharemarkets have bounced higher across the globe as bad news has evaporated and volatility has fallen.
• In simple terms, would you want to invest if the sharemarket is bouncing around on a daily basis with advanced economies in Europe and North America lurching from crisis to crisis? The “do what it takes” attitude of European and US politicians has been fundamental in restoring stability.
• The Australian sharemarket has done relatively better than the US markets over the past five months, largely because it under-performed in early 2012 when there were uncertainties not only about advanced nations but also China. But now with fears allayed about a “hard landing” in China, investors are again keen to back Aussie shares.
• This note attempts to separate the hype from the reality, presenting the pertinent facts and figures on the sharemarket’s performance.

State of Play

• The ASX 200 has lifted 8.3 per cent in the 32 trading days of 2013. If the index was to keep up this pace over 2013, it will have lifted by 67 per cent. The broader All Ordinaries has risen by 8.4 per cent in 2013. The All Ordinaries Accumulation index (includes share price gains and dividends) has lifted 8.5 per cent this year.
  Over the year, the ASX 200 is up 18.4 per cent with the All Ordinaries up 16.8 per cent. The All Ordinaries Accumulation index is up 23.9 per cent.
• The US Dow Jones has lifted 6.7 per cent in 2013 so far with the S&P 500 up 6.6 per cent and Nasdaq up 5.7 per cent.
• Of other major markets, the Japanese Nikkei has gained 8.4 per cent with the UK FTSE up 7.3 per cent but the German Dax has lost 0.2 per cent.
• Over the year the US Dow Jones is up 9.4 per cent with the S&P 500 up 13.1 per cent and the Nasdaq has gained 9.4 per cent. The out-performer has been, the Japanese Nikkei, up 20.7 per cent, with the UK FTSE up 7.4 per cent and the German Dax up 12.4 per cent.
• According to FactSet, in US dollar terms the Australian sharemarket has risen by 7.1 per cent so far in 2013, ahead of the “world” market with a gain of 5.0 per cent but just behind the 7.2 per cent gain of the US market. The strongest gain has been recorded by Argentina (up 18.5 per cent), followed by Greece, (up 16.6 per cent).

Total returns

• Over the past 20 years, the All Ordinaries Accumulation index has risen on average by 11.5 per cent a year. In the US, the S&P 500 total return index has lifted 10.0 per cent on average over the same period.
• Over the past decade, the comparison was: All Ordinaries Accumulation index, up on average by 11.7 per cent a year versus gains of 8.8 per cent a year for the S&P 500 total return index.
• Over the last five years, the comparison was: All Ordinaries Accumulation index, up on average by 2.0 per cent a year versus gains of 4.5 per cent a year for the S&P 500 total return index.

Proximity to record highs

• The All Ordinaries peaked at 6,853.6 on November 1 2007 with the ASX 200 at 6,828.7 on the same day. The All Ords needs to rise 35.6 per cent to reach record levels while the ASX 200 needs to lift 35.7 per cent.
• In terms of total returns (share prices and dividends) both the All Ordinaries Accumulation index and ASX 200 Accumulation index need to lift around 7 per cent to reach record highs.
• The current value of the Australian sharemarket (market capitalisation) stands at $1,588.3 billion, just over 10 per cent below record highs.
• A number of market sectors (accumulation indexes) are already at record highs: Financials (excluding REITs), Industrials and Consumer Staples. The Telecoms accumulation index is just 0.8 per cent below the January 29 high. And the Utilities and HealthCare sectors are around 2 per cent below record levels. The main drags are Energy, Materials and Consumer Discretionary sectors.
• The US Dow Jones peaked at 14,164.5 on October 9 2007 while the S&P 500 peaked at 1,565.2 on the same day. The Dow Jones needs to lift 1.3 per cent to reach record highs while the S&P 500 needs to lift by 3.0 per cent.
  Arguably – just like the US Nasdaq – the Australian sharemarket rose too far, too fast during the China boom of 2007. The market soared above its long-term trend band (“normal” growth rate) and then fell to the bottom of the band and now the market is again aiming for the middle of the band. The 1987 sharemarket was a similar case where irrational exuberance took hold.

Volatility dries up

• Over the past six months there have been only six days when the ASX 200 has either risen or fallen by 1 per cent over the session. Two of those days occurred in January but they were days when the market rose by just over 1 per cent. There were no high volatility days in December.
• Volatility eased over 2012 but the reduction was particularly evident from September 2012. Investors began to edge their way back into the market over September and October but the gains since November 16 2012 have been stellar with the market lifting by 1,000 points.
• Consumer sentiment in Australia is especially sensitive to sharemarket movements. In the latest survey, the consumer sentiment index lifted 7.7 per cent in February despite a decision by the Reserve Bank to leave interest rates unchanged in the month and a softer Aussie dollar. The main catalyst to the lift in confidence levels was the continued recovery of the Australian sharemarket, boosting incomes for direct shareholders and superannuants alike.

Cheap or Dear? Valuations recover

• According to FactSet the 1-year forward price-earnings ratio for the Australian sharemarket stands at 15.44 – the highest level in almost three years (since March 2010). But while the forward PE is still below the 20-year average of 15.6, it stands above the decade average of 14.6.
• While the Australian 10-year average forward PE is 5.7 per cent above decade averages, the equivalent ratio in the US is almost 11 per cent below the decade average while the “world” index is 6 per cent below the decade average. A number of Asia-Pacific markets also have PE ratios above long-term averages and also seem poised for a period of correction.
• Similarly the historic PE ratio for Australia stands at 16.97, above the decade average of 16.5 but below the 20-year average of 18.9.

Dividends still attractive

• The dividend yield for the broader Australian All Ordinaries index stands at 4.34 per cent, the lowest levels in 17 months and down from highs of 6.85 per cent set in January 2009. However the current dividend yield is still above the decade average of 4.05 per cent and the 20-year average of 3.84 per cent.
• Of major stocks, current historic dividend yields include: NAB (6.10 per cent), Telstra (6.05 per cent), Westpac (5.69 per cent), Commonwealth Bank (5.39 per cent), ANZ (5.22 per cent) and AMP (4.89 per cent).
• By comparison the Reserve Bank quotes the “special” rate for term deposits at 4.25 per cent, down from highs of 6.00 per cent in July 2011. The rate for bank’s bonus savings accounts above $10,000 stands at 4.50 per cent, down from 5.45 per cent in October 2011. In terms of property, RP Data/Rismark quoted gross returns on dwellings in January ranging from 3.4-15.4 per cent with the capital city aggregate at 6.3 per cent. Rental yields stood at 4.9 per cent for units and 4.2 per cent for houses.

Outlook

• The Australian sharemarket has come a long way in a short space of time with the ASX 200 up 1,000 points in the past three months. The sharp run up in share prices is in response to more settled global economic conditions, prompting investors to move out of lower-yielding defensive assets into “riskier” assets such as shares and property.
• As at September 2012 there were 23 per cent of financial assets held in cash and deposits, above the long-term average of 20.2 per cent. At the same time there were 15.7 per cent of assets held in listed shares, below the long-term average share of 19 per cent. To get to a “normal” share of assets, cash & deposits would need to fall around $220 billion while holdings of listed equities would need to rise by $260 billion. Since September, the market capitalisation of the sharemarket has lifted by around $200 billion.
• The sharp run up in share prices has gradually reduced the attractiveness of shares. The price earnings ratio has now lifted to three-year highs and is close to 20-year averages as well as being 5-6 per cent above decade averages. Again, the sharp run-up in share prices has served to push down the returns (dividend yields) of major companies.
• While at some point the Australian sharemarket faces a period of correction or consolidation, there is still a wave of funds flowing from cash and other defensive assets to shares and property. While a significant value of funds has already moved back into equities, around $100 billion is still likely to flow from cash to equities to establish a small overweight position.
• We retain a conservative view on the sharemarket, tipping the ASX 200 / All Ordinaries index to end 2013 around 5,300 points. That target could indeed be overshot in the next few weeks, and we will closely monitor the progress of markets before re-assessing forecasts.
• But we are conscious of the fact that advanced nations still have hurdles to clear. European nations need to strike a balance between growth and austerity to ensure they are sustainably achieving progress in winding back budget deficits and government debt. A general election in Italy will also be closely watched to ensure that the new government is committed to fiscal consolidation.
  It is a similar situation in the US, although encouragingly housing and export sectors are growing. Congress must still achieve agreement on the budget as well as the debt ceiling.