Please find attached this week Investment Fundamentals. Highlights of the week include:
Despite intraday volatility, the market barely moved for the week, losing 17 points on a 50 Leaders basis from 4066 to 4048.9. Following this slight reduction in prices, the Total Shareholder return improved slightly from 25.0% to 25.1%, comprising capital gains of 19.8% and a dividend yield this year of 5.3%, rising to 5.7% next year and 6.1% the year after.
14 upgrades to earnings for the week against 11 downgrades to earnings. Again, most of the earnings upgrades are due to analysts converting $US earnings into $A earnings at a lower exchange rate rather than improving fundamentals. Upgrades were seen to AGK, BHP, BXB, CBA, CPU, FMG, ILU, ORG, OSH, QBE, RIO, STO, TAH, WDC, and WPL (large). Downgrades were seen in ANZ, CCL, IPL, MQG, ORI, QAN, SHL, SUN, TOL, WBC and WES. The biggest mover was Woodside Petroleum which saw 2012 EPS upgraded from $2.51 to $2.62 for the week and from $2.42 one month ago.
Risk parameters moved steeply higher across the board reflecting macro risks and uncertainty over the near term direction of markets. Both Credit Default Swaps and Implied Volatility Indices moved higher. CDS swaps climbed 10 basis points on average whereas average implied volatility across the 50 Leading stocks rose from 22.2% to 25.4% over the week, with a big move up in the banks from 18 to 23. Mid 20 volatility for the banks represents an opportunity to write covered calls as we recommend investors look to achieve returns through dividend income in the current market environment.
The overall financial risk as captured by the credit default swaps is leading to a blow out in the equity Risk Premium as we have analysed in our recently published Australian Share Market Valuation Report.
Oil Search (OSH), Sydney Airport (SYD) and AGL Energy (AGK) all had increases over 2% to their target prices in the last week whilst Leighton (LEI), Lend Lease (LLC) and Crown (CWN) all had their target prices trimmed by about 1%.
A number of key commodity prices have fallen over 10% month to date including iron ore (down 10.4%), WTI Oil (down 13.4%) and Copper (down 10.5%). This is weighing on both the earnings estimates and prices of Australian resources shares and we are still cum-downgrades to earnings in US dollar terms, notwithstanding the lower currency.