Overnight the forces of darkness tried to get everything down and then ran into some leaks from the European Central Bank (ECB) ahead of tonight’s meeting and everything reversed.
I may well regret writing this, but across all asset classes it again looked like “the calm before the calm”, with the S&P 500 losing just one point after GLOBEX Futures indicated a seven point loss in our trading session yesterday.
Let’s see what ECB boss Mario Draghi delivers in his speech tonight; if the leaks are accurate, and they most likely are, the markets will clear another hurdle in the wall of worry. Watch the euro tonight, it is the key to everything.
Resources slump
Considering the indiscriminate carnage in Australian resource stocks and those who provide services to them it’s hard to believe the Australian Dollar is still above parity at US$1.0193.
Of course, the “I hate Australia/unlucky country trade” is gathering steam with just about every top down commentator convinced that the fall in the iron ore price means Australia is “doomed”.
Yes, it’s a negative development for everything from resource sector earnings right through to tax receipts, economic growth and potentially employment if you believe current low spot iron ore prices are going to be sustained. But I think it’s a very long bow to draw that the 30-day accelerated fall in the iron ore price is going to translate to a spike in unemployment, a residential housing crash and associated mortgage bank bad-and-doubtful-debts cycle.
Remember, late last year it was the European debt crisis and our banks wholesale funding gap that was the going to trigger our “doom”. The sky is always about to fall in Australia according to the Chicken Little’s.
The one thing I do agree on with most commentators is the Australian dollar being vulnerable to a further pullback. The Aussie fell to 80.89 euro cents last night, while the Aussie versus the US dollar support kicks in around 96 US cents.
From a strategy perspective I’m continuing to look for under-priced East Coast industrial exposures with high sustainable dividend yields. A little while ago I recommended Bank of Queensland (BOQ) as a turnaround story.
BOQ is under the radar of most people, but it is a genuine turnaround as south-east Queensland property prices bottom out, the balance sheet has been strengthened, and the company is getting some direction under the leadership of Stuart Grimshaw.
The banks five-year chart really interests me, with the downtrend potentially broken by confirmation of the turnaround at the pending result due on 18 October.
Bank of Queensland (BOQ) stock chart
Despite the rally since we first recommended BOQ, the stock remains undervalued on all investment metrics. For full-year 2013, we forecast earnings per share to grow by 81 cents, with a price to earnings ratio of 9.3-times, a price to book ratio of 0.8-times, a yield of 7% and an increase in return on equity (ROE) to 9.8%. The yield alone of 7.2% fully franked should be enough to drive outperformance, particularly as the market gets more confidence in the turnaround/balance sheet repair story.
We maintain our Accumulate rating and upgrade our 12-month price target to $7.80 from $7.15 previously.
Forge Group (FGE) – Buy
- Recommendation: Buy (unchanged)
- Price: $3.78
- Target (12 months): $6.40 (unchanged)
- Expected capital growth: 53.2%
- Expected dividend yield: 3.6%
- Total expected return: 56.8%
Forge has announced a notice of award from Rio Tinto for a $280m equipment, procurement and construction contract for the combined-cycle gas turbine power station at Cape Lambert. The project is expected to be delivered early in 2015.
Forge enters full-year 2013 in a very strong operating position with the scope to win significant
packages of work that could further bolster prospects. The company continues to generate an exceptional return on equity of 30%, while retaining a high level of growth and operating cash realisation. At 2.6-times estimated full-year 2013 earnings before interest, tax, depreciation and amortisation (EBITDA) valuation is undemanding and not reflective of the near-term earnings prospects or presence of a cashed-up corporate on the register. We retain our Buy rating.
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