It is always amusing to compare how the ASX has performed against the S&P/ASX 200 stocks (which trade on the ASX). ASX shares have done very poorly against the ASX 200 since the GFC, not suprisingly. A Royal Bank of Scotland report notes that the market has been subdued for about three months, even in the derivatives area. Not entirely a bad thing if you are suspicious of the financialisation of developed economies:
Post the extreme levels of volatility seen in August, equity and derivative trading volumes have receded and we have lowered our expectations accordingly. Whilst the commencement of trading competition has highlighted its limited impact, market uncertainty and longer-term threats are still affecting sentiment.
The ASX is on a pretty high earnings multiple of about 14 times, but with a dividend yield of above 6% it looks a reasonable income play. RBS has a hold and a target price of $31.77. It is obviously a cyclical stock, and the cycle is pretty bearish in equity markets. There is also the troubling problem of competition from Chi-X. The interesting thing is the decline of derivatives trading, which can operate just as effectively in bear markets as bull markets. It suggests a widespread easing of confidence:
The value of cash equity trading has now declined three months in a row as market uncertainty reduces activity levels. Average daily value traded in November was down 24% on the pcp to A$4.45b. The entry of Chi-X has had minimal impact thus far, taking roughly 0.8% market share since its commencement on 31 October, although it is early days. Weak ECM activity is also likely impacting revenues, with total capital raisings for FY12TD down 32% on the pcp.
ASX24 derivative volumes subsiding after a strong start to the year
ASX24 derivative contract volumes have fallen rapidly post the strong volumes experienced in 1Q12. Average daily contracts traded in November were 9% lower than the pcp and ASX24 will be cycling much stronger comparatives in 2H12. However, any further declines
will have a limited EPS impact given the rebate growth threshold is set at 2.5% for FY12.Changes to forecasts – FY12/13F EPS lowered by 3% & 2%
We have lowered our FY12/13 EPS forecasts by 3% and 2% respectively. This largely reflects reductions to our estimates for cash equity trading and listings revenue given ongoing weakness in activity levels. We have also reduced our FY12 growth rate for ASX24 derivatives from 20% to 17%, reflecting the recent decline in contract volumes. This has been offset by increased volume assumptions for ASX equity options. Our share price target falls to A$31.40 from A$31.77.
It all adds up to a medium risk play with some income downside but no obvious undervaluation to drive interest. And equity markets may have a lot more downside depending on what happens in Europe. Still, for those interested, shares in the ASX can be pruchased — on the ASX.