Can't find value in the market? You're not looking
By Alan Kohler, The Age
June 1, 2005
A lot of analysts and investors say they can't find any value in the market at the moment. Well, they're not looking hard enough.
After a 13 per cent correction, peppered by some huge maulings, the small cap end looks a cornucopia of value. Likewise many resource stocks - both large and small. Many of the maulings have been deserved, such as Multiplex, but many have been overdone, such as Newcrest. In general, good value is easy to find.
One reason for the bearish sentiment and the overreaction to profit downgrades is that there is a cash drought - the institutional supply of funds has largely dried up. Broker opinion tends to follow the money rather than the other way around. Institutions are withholding cash; therefore there must be no value to be found.
In fact, fund trustees and managers are rebalancing. After a 27 per cent run up between May 17, 2004, and March 21, 2005, they had become, as a group, overweight in equities and most have, or think they have, a duty to stick with standard allocations.
The rebalancing is now almost over. With the amount of cash pouring into super funds, simply by sitting on the money they quickly reduce investment asset percentage weightings in favour of cash.
In addition, trustees and fund managers have been looking for excuses to dump stocks where possible. Many hapless chief executives who have provided such an excuse have been knocked over in the rush. The four big takeovers soon to be concluded and worth a total of $18 billion - WMC Resources, Southcorp, Foodland and National Foods - will complete the process.
Institutions will soon start moving back into the sharemarket and - lo! - there will be value. Brokers will exclaim that shiny nuggets absolutely litter the landscape - you just have to bend over and pick them up. Fund managers will agree because they want to get their equity mandates, and therefore fee incomes, up. There might even be a buying panic.
The average market dividend yield is currently 3.9 per cent, which grosses up to just above 5 per cent after franking credits. This is the same as the 10-year bond yield. Many stocks are yielding more than that.
With the 10-year bond rate at 5.1 per cent, the only reason you would pass up a 5.1 per cent effective dividend yield from a company that is reinvesting, say, 30 per cent of its profit (which means it will definitely produce at least some capital growth), is because you are scared.
Scared of what? Falling profits - rising bond yields - America.
The current run of economic data, including yesterday's retail sales, suggest that there could well be some pressure on profits this year, but Eric Betts of Nomura points out that "the vast majority" of companies are likely to hold their dividends. "There could even be an upside surprise," he reckons.
And Australian stocks are being priced as much on dividend yield as earnings at the moment.
Bond yields are historically low, it's true, and the yield curve is inverted (that is, long bond yields are lower than cash rates) which is unusual. But what if the next move in cash rates is down? After yesterday's run of data a few more economists jumped on the "next rate hike is a cut" wagon. Maybe it will be.
And then there's America. Adrian Blundell-Wignell and Alison Tarditi at Citigroup have produced some fascinating research comparing the current position of the US and China with that of the US and Japan during the 1960s and '70s.
Their conclusion is that the key to whether Chinese industrialisation induces a commodity "supercycle" is US productivity. That's because in order for China to keep growing at its present rate through exports, the West (that is, America) has to buy them. For that to happen, US real incomes need to keep rising.
Blundell-Wignell and Tarditi show that a US productivity collapse between 1970 and 1985 basically brought Japan's extraordinary growth to an end.
But in 1970, exchange rates were fixed and the US economy was closed.
Now the thing to watch again, they say, is US productivity, and there is little reason to doubt the Fed's forecast of 2.6 per cent growth in it.
Which means there is no reason to get off the China-US-supercycle theory and run away from good, cheap stocks.
Unit holders of General Property Trust vote on the proposal to internalise management of the trust tomorrow. If it's a close vote, and it only gets up because of Westfield's grubbily acquired vote, then a truckload of excrement is likely to hit the proverbial fan.
As it should. Westfield has been sold three of GPT's best properties at less than market value to secure its vote for the deal. This blatant bribe taints the whole proposal and makes it appear that GPT directors lack confidence that unit holders would vote for it because it's a good deal. That's a pity, because the deal looks fine. It's the tactics that are not.