Are Stockbroker Expectations For Australian Equities Too High?

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Are Stockbroker Expectations For Australian Equities Too High?

When stockbrokers and other share market experts in December set targets for the Australian share market in 2011, a popular range was 5500-5600 for the ASX200 index by year end. This suggests that after a lacklustre performance in 2010, when the Australian share market only posted a small positive return if one includes dividend payouts throughout the year, that 2011 should provide much better returns into the high double digits.

However, a recent study into price targets by leading stockbrokerages in Australia for shares that make up the ASX200 index suggests these projections are too high. Combining all price targets and applying them in line with index weightings for the respective shares has generated a target for the ASX200 index of circa 5350. In addition, a discount to this "target" seems but appropriate as for the ASX200 index to reach 5350 by year end implies that all 200 stocks will reach their consensus price target by December, which seems unrealistic.

Financial news, data and analysis provider FNArena closely monitors the views and projections of eight leading stockbrokerages in Australia on a daily basis. These stockbrokers are Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS. As part of its service, FNArena calculates consensus price targets for more than 400 ASX-listed shares that are covered by these eight stockbrokers. Past analyses by FNArena have shown that shares tend to meet stiff resistance as they approach or try to exceed consensus price targets. It is therefore FNArena's view that consensus price targets can be used as a reliable indicator for future upside potential for the Australian share market.

"What makes this latest survey unique", according to FNArena editor Rudi Filapek-Vandyck, "is that it uses the stockbrokers' own price targets to show that most year-end projections for investment returns in the Australian share market seem too optimistic."

He notes nearly half of all ratings for individual stocks from the eight leading stockbrokerages is now Buy, or an equivalent of Buy, whereas the historical norm for Buy ratings lies in between 42-44% of all individual stock ratings. As at Tuesday, 5th April, 2011 the relative number of Buy ratings as registered by FNArena stood at 49.46%, against 9% Sell ratings and 42% Neutral/Hold. According to Filapek-Vandyck, this too suggests that stockbrokers are too optimistic about the return potential for Australian shares over the remaining nine months of 2011.

Stockbrokers have consistently issued more rating upgrades than downgrades since the share market corrected in mid-February. If this trend continues, this will push Buy ratings above 50% of all ratings on record. According to Filapek-Vandyck, the last time this happened was in 2003, during the final stages of the bear market at the time.

Price targets are not set in stone, they are constantly updated as new information becomes available. The upcoming interim results by Australian banks and the full year reporting season in August will thus be of key importance for the share market's upside potential.

FNArena has observed recent additional increases to price forecasts for base materials and energy by leading stockbrokers have only led to price target increases of around 5% (on average) for companies in both sectors. This suggests one has to adopt an extremely bullish outlook for commodities, and ignore the potential damage from higher oil prices, to expect further increases in price targets to allow the ASX200 reaching 5500-5600 by year-end.

In addition, while price targets for producers of natural resources and energy might still carry further untapped potential, targets for industrial stocks potentially carry further downside. A prime example is Qantas whose consensus price target has fallen by nearly 2% over the past week. On FNArena's observation, earnings forecasts for Australian companies outside resources and energy have been in decline since May last year and they remain in a negative trend today. Earnings projections are a key input for stockbrokers' price targets.

All in all, it seems an end of year target for the ASX200 of 5100-5200 is far more realistic, says Filapek-Vandyck. This corresponds with potentially low double digit returns, including dividends, rather than high double digit returns.

Current market consensus forecasts put the implied dividend yield at circa 4.50% for FY11 (of which interim dividends have already been paid out) and at close to 5% for FY12.

Many stocks, including prominent blue chips, are still trading at considerable gaps to consensus price targets, suggesting successful stockpickers might enjoy higher returns. A few examples are:

- Qantas shares are trading 40% below consensus price target of $3.05
- BHP Billiton shares are trading more than 12% below consensus price target of $53.40
- Rio Tinto shares are trading more than 26% below consensus price target of $108.40
- ANZ Bank shares are trading 9.5% below consensus price target of $26.17
- Woolworths shares are trading more than 12% below consensus price target of $30.09

Analysis by FNArena suggests the Australian share market has underperformed international peers over the past year due to a more subdued earnings growth profile, in particular for domestic oriented companies outside base materials and energy. Current trends in earnings forecasts by leading stockbrokerages suggest this underperformance is likely to continue in 2011.

Media contact:

Rudi Filapek-Vandyck, Editor FNArena
            Phone: (02) 9907 8482
            Email: rudi@fnarena.com


About FNArena:
FNArena is an online newsletter offering tools, data and independent analysis and commentary on the Australian and global financial markets. More information can be found at www.fnarena.com.

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