OK, the market is in a terrible hole. But the question is what has the market priced in and how accurate is it? No earnings growth at all in the case of Rio and BHP, and precious little growth across the market more generally. Such bearishness has proven close to the mark, but it is worth watching for significant mis-pricing. Deutsche notes that the downgrades continue, although their rate has slowed:
Over the past month earnings forecasts were cut for 117 ASX200 companies, compared to upgrades for 68. This is the best ratio in 6 months, but is still below long-run averages. More concerning is the plunge in earnings revision ratios globally. As an example, for every S&P500 company having earnings forecasts upgraded, there were almost three seeing downgrades, the worst ratio since March 2009. The chart below shows that equities haven’t tended to rally sustainably until the worst has been seen, though this may not be too far off.
Deutsche says earnings growth will be 14% this financial year, falling to 13% next year:
Consensus aggregates appear distorted by issues such as recent demergers, and consequently understate growth. On our estimates, consensus is looking for 14% EPS growth in FY12, with resources again expected to be the driver. The market PE ratio of 10.8x (7% below the 18m average) suggests skepticism amongst investors that this growth will be delivered. We estimate that consensus is looking for 14% growth for industrials in FY12, but 12% excl. Leighton. We retain our view that this will drop to 5-10%. Banks are expected to grow earnings by only 3% in FY12, which looks easily achievable. Still, with recent outperformance banks are looking less cheap. Resource valuations look attractive, but there is considerable near-term uncertainty around the direction of key commodity prices.
Once again, the momentum comes from resources. Which means China drives our market. Which means Australia’s two speed economy is something like a microcosm of a two speed global economy. Which means uncertainty is still high.