Brokers ready to run with the bulls as drought ends
Published in the The Saturday Age, Melbourne, February 2013
Many analysts are quietly confident as the recovery in global markets gathers steam, write Adele Ferguson and Mark Hawthorne.
As far as barometers of the financial markets go, Collins Quarter is a hard place to beat.
The little bar is located across the road from 101 Collins Street, Melbourne’s famous Citadel, a building which, at upwards of $1,000 per square metre to rent, ranks among the most expensive city real estate in the country.
The Citadel is home to Macquarie Group, Morgan Stanley, Bell Potter Securities, lB Were, JP Morgan and Lazard, among a host of household names from the world of finance.
When many of those companies shed staff amid the global financial crisis, the bar was where many gathered to shed a tear or three with colleagues.
Gloom and doom has hung over such bars for the best part of five years.
But after some lean years, the brokers are gathering at Collins Quarter again, but this time in much happier circumstances.
"I have never known so much about the ups and downs of the sharemarket as I have since I started working here.
I can see it in their faces every night, if the market has had a bad day or a good one. For the past couple of weeks, they have seen some good ones," the general manager, Yuksel Yucetepe, said.
And so it was again this week, when BusinessDay dropped in on a Wednesday night.
The place was packed with "suits" from all the big firms, enjoying what they affectionately call "Pig Wednesday" when spitroast pork rolls are dished out at $7 apiece.
The beers are flowing, even at 8pm in the middle of the working week.
"Mate, I haven’t had two brass razors to rub together in about four years," said one broker, from Bell Potter.
"No sign of a bonus, no brokerage, but the last two weeks have been great, so it’s time to enjoy the good times again."
It is a scene that is being replicated across the country. From Sydney’s Martin Place to Perth’s St Georges Terrace, stockbrokers are celebrating the end of a long drought.
Last month, for the first time since the global financial crisis devastated retirement savings, the nation’s super funds returned to their pre-crisis levels, helped by a 14 per cent increase in the share market over the past 12 months.
In the past quarter the ASX 200 index has risen 12 per cent in lockstep with the surge in global sharemarkets.
In the US, Wall Street is just 5 per cent off an all time high and in Europe equity markets have also risen as the "rotation" from bonds to equities gathers steam. Price-to-earnings ratios have jumped from 10.6 a year ago to 13.7 and volumes going through the market have almost doubled.
Caan Krsztew-Ivanow, a senior consultant in banking and financial services recruitment at Randstad, says the change in sentiment has been palpable.
"The last eight months of the year were dead for the stockbroking industry," he says.
"In the past two weeks, we’ve pretty much had every major firm in the country we deal with come to us and say get ready, we’re hiring’.
I can see March being very good for the industry."
It is in sharp contrast to nine months ago when a number of brokers were struggling to survive as business dried up, corporate activity flat lined and margins continued to come under attack.
But the equities revival hasn’t gone unnoticed. With most of the world economies still basket cases, China’s economy slowing and Australia battling its own problems including the uncertainties associated with an impending federal election, the experts are divided.
Has the global equities market officially entered a bull cycle or is it illusory?
Craig Drummond, the chief executive and country head of Bank of America Merrill Lynch, Perpetual’s head of equities, Matt Williams, Tyndall’s head of equities, Bob Munster, Deutsche Bank’s Scott Mailer, and others believe the rally isn’t a false start, but a clear shift in the cycle.
Indeed, Craig James at Comm-Sec revised his end-of-year forecasts for the Australian sharemarket to close at 5300, up 14 per cent.
"It does appear on current developments that we were too pessimistic, swamped by a perfect storm’ of bad news," James says.
He had previously estimated a year-end close of 4900 to 5000 points.
Drummond believes the turning point in the cycle was when the European Central Bank president, Mario Draghi, made his famous "whatever it takes" speech about Europe.
"Those comments said to investors there isn’t a lot of downside in taking on risk.
Prior to that point there was massive uncertainty about what the ECB would do and whether they would provide the liquidity," he says.
"Falling interest rates have helped, but it is also confidence, that’s what has changed."
For Drummond the world is continuing to globalise and the equities rally is a global thematic.
"If global equities run, Australia will be part of it," he says.
Perpetual’s Williams says there has been a clear shift in interest rate expectations and bonds, and Australia has been late to this.
"This time last year I said we would have a positive year. It outperformed even my expectations, particularly the industrial sector, which was up 19 per cent. It will be hard in the absence of earnings upgrades to replicate that, but with the dividend yields on offer the chances are good for another positive year," he says.
The rotation into global equities has extended to retail.
A report from Bank of America Merrill Lynch showing that retail investors pumped billions of dollars into the US market in the past few weeks after redeeming more than $US 100 billion ($96 billion) last year and close to $US450 billion since 2008.
It is this which is giving the experts pause and prompting some panic buying as investors worry they might miss out.
From a local perspective, it means that the current profit reporting season, which is expected to report flat earnings, is unlikely to dampen confidence.
"This is not an earnings-driven recovery, but it never is," says Drummond.
"The prospect is that dividends will start to grow in 2014, along with earnings."
US broking house Citi wrote on Tuesday: "If we’re right and the reporting season is reasonable, it should give further impetus to the market, though it has run hard lately, and partly on some encouraging signs about the results.
But we still expect the market to go higher through the year, with our S&P/ASX 200 target of 5200 for end 2013, as moderate earnings growth returns in full year 2014."
Macquarie Equities recently issued a note saying Australians were taking the view that "lower interest rates via lower mortgages rates will be the catalyst that shakes households out of their GFC-induced malaise and finally drive the upswing in earnings per share growth that has been so absent in this market (ex-resources) over the last three years".
But not everybody is a bull.
Simon Bond at RBS Morgans takes the view that the current rally could be built on false hope.
"Most market participants are paid to be bullish and paint a brush of optimism but that optimism may get wiped out if we have more bad news, and the canary in the coal mine for me is unemployment," he says.
"There will be lots of left-field events globally and locally this year but if the markets go up what will push them up is a search for yield.
Eight out of 10 trades we are doing are from SMSFs [self managed super funds] and they are buying high-yielding stocks such asANZ, CBA, Coca-Cola Amatil, Origin Energy and Telstra."
This obsession with yields coincided with shopping centre owner Westfield issuing a statement on Friday that it expects to meet its distribution payments in the December half Some believe it is a fool’s game to chase yield in a fragile world.
An executive in a top 200 company wrote in an email to BusinessDay: "Capital preservation and not income growth should be the focus over the next few years.
Just go back to comments made by the governor of our Reserve Bank when the official cash rate was set at 3 per cent during the GFC.
He stated that this was a rate which reflected catastrophic global economic conditions which we are unlikely to ever see again.
Well, here we are again, only this time the official cash rate is forecast to drop to 2.25 per cent in 2013."
The executive said the crisis talks in the US and Europe had not changed anything.
"Sorry, there has been a change.
They are actually getting worse. Developed countries are still running massive deficits and banks are still time bombs.
Millions of foreclosed homes around the world are still sitting in the books of both government and banks, yet the markets are saying that the housing market has recovered.
Did these toxic assets simply disappear? The US has over 50 million citizens living off food stamps [financed by the government which has over $U516 trillion in debt which will never be repaid].
"GDP will further erode over 20 13-14 and unemployment is clearly understated using the participation rate method and deteriorating further in key countries, but the financial markets aren’t worried."
Mike Hawkins at Evans and Partners believes the rotation away from ultra low-yielding asset classes, including gold, into relatively high-yielding equities has barely begun but he is not bullish on Australian equities.
Australia is a relatively high risk investment.
It is chronically uncompetitive, declining industry diversity and gross foreign liabilities equivalent to 146 per cent of GDP," he said.
Hawkins believes the ASX 300 is a "low- quality investment universe", which is capital intensive, has high industry concentration and structural challenges for many sectors.
If that isn’t clear enough, he says: "Corporate quality and strategic opportunity is far better offshore.
What the ASX delivers in terms of higher dividend yield it has lost over the past five years from inferior dividend per share growth.
We will never be wealthier.
We can buy superior international assets with an overvalued currency."
The market’s 10-day-straight rise broke on Thursday, when it fell 0.4 per cent. On Friday the ASX 200 closed 0.87 per cent higher at 4921.1.
As 2MG fund manager Mike Mangan says: "As I told a mate yesterday, the most you can get on a term deposit is 4 per cent pre-tax.
Telstra is still yielding 6 per cent fully franked even after rising 84 per cent in last two years ... It’s a no-brainer really."
The string of cuts to official interest rates has created a situation where bank term deposit rates are paying substantially less than the bank’s dividend yields, which average about 6 per cent for the big four banks.
According to BBY’s banking analyst, Brett Le Mesurier, "for these reasons, bank share prices should increase further, albeit more slowly, over the coming years and they all deserve buy’ recommendations".
Deutsche Bank’s Mailer believes interest rates in Australia have another 75 basis points to fall between now and September.
If he is right it will make holding cash or term deposits even less attract-Patrick Trindade, the head of private wealth at Octa Phillip Financial Group, sees the return of risk appetite in the markets.
"We are doing an initial public offering for a company called Real Energy at the moment, and we were surprised at the level of interest both from offshore and in Australia in a domestic shale play.
That appetite just wasn’t there a year ago." But even the bulls agree it will be a bumpy ride this year, otherwise the 5 per cent gain in the market since the start of the year would put it on track for gains of 65 per cent by the end of the year.
In a note to clients, Dale Gillham, the chief analyst at private investment company Wealth Within, wrote: "This week our market has risen again, which takes the current bullish move to 10 weeks in length.
In fact, bull runs of at least 10 weeks in length without at least one down week have occurred in 1987 just before the crash, in 1993 and 1997.
"The longer the rise the higher the probability a fall will occur, and right now price is close to resistance at 4900 points and very strong resistance at around 5000 points.
Given these factors I believe a turn to the downside is very close, and as such, investors might be wise to wait for the opportunities that a down move will present.
I still believe that after a short fall our market will be bullish overall for a little while longer."
Nevertheless, there is a wall of cash waiting to be invested at some point.
Rainmaker’s Alex Dunnin says 29 per cent of self-managed super fund assets are held in cash, equivalent to $125 billion, and 10 per cent of institutional money is held in cash.
Dunnin says the issue is if rates keep going lower or even if they just stay low then will the SMSFs stay in term deposits or will they move to bond funds (to get the capital return from bonds rather than just the yield) or will they move to equities?
"The answer is some of this money may move but given the certainty of cash against the train wreck that super was during the GFC it’s hard to see SMSFs throwing caution to the wind just yet, plus they are by their nature more fearful of downturns.
While this cautiousness is sometimes criticised we should recall that during the GFC it served SMSFs very well while regular funds took a 20 per cent haircut at their worst, SMSFs proved to be much better preservers of capital which is a big part of why SMSFs are now so popular among new-money younger people," he says.
Because of this, Dunnin believes it is fanciful to believe that SMSFs will move this wall of cash into equities in any large way.
For now, the most likely trend is companies relying on cost cutting and productivity gains to bolster margins and lift underlying growth.
It is a theme expected to dominate the reporting season.
In the past few months a list of companies have flagged cost cutting as away to improve profits.
Rio Tinto, Qantas, Boral, QBE, BlueScope Steel, Fortescue Metals and numerous others have joined the chorus of cost cutters.
In the meantime, at Collins Quarter, the money, it seems, is flowing again. It has been the most profitable January since the financial crisis as brokers squeeze through the doors.
"Definitely the best January takings we have seen here," says the manager.
"Lunch bookings are up and the bar takings are at a January record."
There are a lot of people hoping it stays that way.
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