Why the ASX is the global laggard

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Some great analysis today from UBS on why the ASX is stuck in the mud:

Softness In Aggregate Market Earnings in FY15
Australia has struggled somewhat over the last few years for earnings growth. FY15 looks to be another soft year, at least at the aggregate level. Consensus estimates are for around 6% growth, though our “top-down” estimate is 2-3%. Lower commodity prices from here could see growth slip into the negative territory.

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Better Earnings Trends For The Ex-Resources Market
Excluding resources, earnings trends have been better, as has been share price performance. FY15 growth estimates for the market ex resources are currently a more respectable c.8% which is quite a conservative estimate at this relatively early stage of the new fiscal year. We still see risk to estimates as moderately to the downside – a better than usual revision outcome – with downside risk due to still modest top-line conditions and some potential over-optimism on margins.

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Current Strategy View – Market Closing In On Fair Value
Overall the market has bounced back to 14.2x which is close to our fair estimate of 14.4x. We see value in the energy sector and we still like the thematic of being exposed to the lower A$ although cyclical exposures look more interesting than defensives in our view. We see some value in some domestic cyclicals with Harvey Norman and JB Hi-Fi favoured.

There you have it. No EPS growth. I agree on resource. It’s too early for energy. Oil is going lower as global growth disappoints, the market share battle plays out and the US dollar bull runs on. Asian LNG spot prices will come under supply pressure as well. Local cyclicals and defensives are also a poor bet. Here’s two charts from Gerard Minack illustrating why:

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Non-resources profits benefited hugely from the mining boom, yet they have not corrected afterwards. This is largely because Australia is levitating post-boom on an expanded housing bubble – driving banking, building and consumption profits – but next year as spooked authorities sit on the bubble, all three will come under pressure.

Another chart from Gerard Minack tells the tale in macro terms:

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National income drivers sales and resources drive national income.

UBS’s notion of getting non-resources Australian dollar exposure remains the only way to fly.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.