One of the less remarked upon factors in the parochial Australian investorsphere is the spectacular under-performance of Australian equities versus other nations in recent years, particularly the US:
The reason for this is quite straight forward, it’s the over-valued dollar holding down investment, growth and earnings. And on that, more bad news is coming down the pipe as brokers begin to wake up to the damage caused to profit forecasts by iron ore. From Morgan Stanley today:
Bulk Downgrade: Our House view on Iron Ore price has changed materially. With 2H14 forecasts around US$94/t and heading below US$90/t in CY15, the most important shift is to a lower, flatter cost curve, with sustained pressure on Fe prices and cash and earnings generation for the bulk miners.
Mark to Market: As a result of the downgrade, our aggregate house earnings for the ASX 100 Resources index is now ~5% below the Street in FY14e and ~18% in FY15e. For the ASX100, we are now ~2% below IBES consensus in FY14e and ~6% in FY15e.
I was a lone voice of skepticism last year as 14% profit forecasts spread through the market and now the catch-up is on. Goldman Sachs is also getting more bearish the longer the dollar stays high. Only a much lower dollar can turn the ASX around. It is coming but later than it should and only pacing the economy, and profits, down.
