The growing optimism among brokers for company earnings may be well founded. Ron Bewley explains.
In the last issue of Professional Planner I tackled the problem of companies and brokers seemingly not updating their forecasts quickly enough. As a result, I reweighted the data to take a longer-term view – and that upgraded my interpretation of broker forecasts for the S&P/ ASX200 from 10 per cent to the high 20 per cent range. Since that article was submitted, we have had many companies upgrading their guidance – and brokers got behind the enthusiasm.
My view is based on a manipulation of broker forecasts of dividends and earnings, as surveyed by Reuters. I show the evolution of 12-months-ahead forecasts made at the start of each month from October 2009 to the present. Of course, each forecast period is for a year starting with a new month, so that might account for some difference, but I attribute most of the gains in optimism to a clearer picture of the new tomorrow. Back in October, the forecast of a 6 per cent total return allowed for little capital growth. But modest increases in expectations evolved over the next three months that were better aligned with a strong China and a country with unemployment seemingly having peaked at 5.8 per cent in the year before – but still short of expected market returns many were starting to talk about in the media.
With the CBA giving a much more optimistic guidance on January 15, 2010, the floodgates opened for others to follow by way of the release of data or forecasts on profits, production and sales. By the second business day in February 2010, nearly 20 per cent total returns became the new expected future. In point of fact, 18 per cent was the expectation the week before – just before reporting season was to get under way, and just after CBA’s announcement. Because many companies’ guidance was increased just before the opening of the season, many companies struggled to beat expectations by much – and a few fell well short. Over the last month (to the beginning of March) a modest improvement in expectations has been recorded.
Interestingly, the “fix” of my placing more weight on two-year-ahead earnings forecasts – as I reported I did last issue – has produced a forecast this month that’s back in line with the “old” method. In other words, there is no longer a disconnect between the two mathematical views of the world – there is again an internal consistency in company and broker forecasts for one and two years ahead. And a 22 per cent forecast for the year ahead, including dividends, isn’t bad – especially when all of the numbers start to fall into place, giving at least me more confidence in the forecasting process. The sectoral forecasts, too, have fallen into line.
Last year there were some implausible forecasts for some sectors, but a pattern is emerging that resonates with someone who believes in our banking sector, China and the re-emergence of the industrials sector as it recovers from a global recession. The only major changes in sectoral forecasts over the last month occurred in Energy and Property Trusts (A-REITS). The future for the latter isn’t that spectacular, but the Energy forecast seems to slightly better reflect a world that needs Australian-owned oil and gas.
I went back over my records, and it seems that this sort of picture was last painted by brokers in the early months of 2005. So while the “new normal” is yet another catch phrase entering the language of economists, I see a return to some strong – but not spectacular – growth in the S&P/ASX200, with a reasonably broad-based contribution from the sectors. Of course, the usual suspects of Financials and Materials seem likely to lead the pack. We have been here before so, as the song goes: “Everything that’s old is new again.” And when the Australian dollar settles down – the dollar being the reason given by many companies for not reporting as well as they might have – the old “new” should be well and truly back in fashion.
