by Raymond Chan

What happened in February?

Over the month, ASX 200 +5.7%, Nikkei 225 +5.6%, Nasdaq +5.1%, Hang Seng +4.7%, S&P 500 +4.5%, AUD/USD +1.2%, Oil +2.6%, Iron Ore -5.7%, 

What do we think?

ASX 200 was up 5.7% in February on better than expected reporting season. In this issue, Latte with Ray spoke to our analysts, a number of ASX listed companies and fund managers and summarized our thoughts here:

The Facts

  • Consensus Upgrades – the majority of companies either met or exceeded market expectation and the reporting season confirmed the first earning growth since 2011. Final Outcome: 47% broadly met expectation, 27% beat and 26% missed
  • Revenue growth was soft at +4% although analysts maintained view that it would be +7% by full year end.
  • Beat results were mostly generated by cost savings and helped by currency exchange boost.
  • Balance sheets continued to improve while payout ratios continued to increase.
  • Improving Business Confidence - Managements appear more willing to invest under the new government.
  • FY13/14 earnings revisions were almost evenly split between lower, same and higher but averaged 3% overall.
  • FY14/15 earnings revised higher for media, building materials and banks but dragged down by resources, energy and transport. We revised down average FY14/15 earnings growth from 10% to 8% but consensus was lower so revised up to similar level.


Our Observations

  • Current market rally seems to be more about relief that it wasn’t a negative season than any real sign of broad earnings recovery.
  • Surprisingly, many companies who missed or only met expectations rallied after their results (REA, EGP, PPT etc).
  • Companies that exhibited strong growth potential despite the tough conditions were strongly re-rated (CRZ, REA, SEK, RHC etc)
  • Stocks with PE 25x … look too expensive relative to historical trends – the top 10 are 80% above the market. History shows they tend to underperform when the gap in PEs is at this level and take 2 – 3 years to recover.
  • Resources Sector – huge earning upgrades for big miners (BHP, RIO, WPL) all reporting encouraging results. The smaller companies are still struggling with tight funding and poor sentiment
  • Banking Sector – in-line with expectation
  • REITs - largely delivered on expectations during reporting season (total return of around 5% month to date in line with the broader market) as results were well guided and first half distributions already announced.
  • Technology – the best performing sector in reporting season but all stocks are trading at very high multiples. We only own CPU in this sector.
  • M & A activities – the strong balance sheet + record low interest rate + higher stock valuation = more M & A activity in Australia.


What are we going to do?

  • The problem is that the market is now 6.5% above our strategist’s valuation model and already in line with our June target based on forecast earnings.
  • However, there is still 6% upside to our year end target.
  • At 15.3X PE average, our market is > 10%  over the long run average
  • Volatility is rising (as shown in Chart 1) as the market grapples with whether it can keep pushing higher in the absence of any new earnings news and is vulnerable to external shocks.
  • Be very stock selective – buying undervalued stocks with positive technical momentum / confirmation
  • Avoid high PE stocks at this level – REA, DMP, NVT, SEK, COH, RHC, JHX, CRZ, CSL, BRG, BLD, FXJ


Chart 1: Volatility index between 2013 and 2014



Source: Morgans, IRESS


Disclaimer – Morgans Financial Limited (Morgans)

This report is provided for general information purposes only and is not intended as an offer to enter into any transaction.  This information contained in it is not necessarily complete and its accuracy cannot be guaranteed.  We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.

Before a client makes an investment decision, a client should, with or without Morgans' assistance, consider whether any advice contained in the presentation is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation.

The information contained in this presentation has been taken from sources believed to be reliable. Morgans does not represent that the information is accurate or complete and it should not be relied on as such. Any opinions expressed reflect Morgans' judgment at this date and are subject to change. Morgans and/or its affiliated companies may make markets in the securities discussed. Further Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this presentation and may, as principal or agent, sell such securities.

The Directors of Morgans advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. The presentation is proprietary to Morgans and may not be disclosed to any third party or used for any other purpose without the prior written consent of Morgans.

The views expressed here are those of the author and do not necessarily reflect those of Morgans (ABN 49 010 669 726), its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”). Morgans may publish research on the company/s named here, which will be forwarded on request. While this report is based on information from sources which Raymond Chan considers reliable, its accuracy and completeness cannot be guaranteed.

Raymond Chan is the Managing Partner and Authorised Representative of Morgans Sydney Hunter Street - 259387
Morgans Financial Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group
Office: Morgans, Suite 1003, 23 Hunter Street, SYDNEY NSW 2000