Another night of ridiculous volatility in global equity markets, with US and European markets giving back all their gains of the previous night. Hardly confidence inspiring stuff, but if Australia plays its cards right, we’ll be a net beneficiary of global capital flows when the European and US trading dust settles.
This reporting season is confirming that listed corporate Australia is in tremendous shape. I think our stockmarket has already started to outperform overseas, with the S&P/ASX 200 performing much better today than the Dow Jones last night.
Tuesday was without doubt the most amazing day I’ve experienced in 18 years of being at the coalface of Australian equities. And it was the first time I’d seen my colleagues in the dealing room stand up and cheer since Makybe Diva came from behind for her stunning third Melbourne Cup win.
I can’t remember a day that started with a 5% index loss then ended with a 7% rally off the intraday lows – a truly stunning reversal.
Yet, extreme volatility and disorderly markets are doing a disservice to equities. Most rational people approaching retirement would say: “why would I want to invest in that? I may as well go down to Crown Casino at put it all on red”.
This cynical view is justifiable.
It’s no coincidence that this unprecedented volatility comes at a time when computer generated trading – such as algorithmic, high frequency and direct market access (DMA) trading – has risen to represent 60% of equity market volume. If regulators were serious, they would ban all forms of unsupervised electronic trading. Of course, most stock exchanges are listed and they have a horribly conflicted position of wanting volume growth. But all they are attracting is the lowest style of volume growth, which simply scalps genuine users of the equity market.
In my view, the sooner the scourge of unsupervised electronic trading is ruled out by regulators, the better. Australia should be the world leader in this regulatory change if it wants its equity market to have the most integrity and credibility in the world.
Now I’ve got that off my chest, let’s get back to the business of fundamentally working our way through this volatility.
The good news is we are starting to get bottom up news from Australian companies and it’s clearly no worse, and in many cases better, than hugely pessimistic share prices are discounting. I strongly believe Australian equities will be relatively re-rated in a global context once the trading dust settles.
Cochlear (ASX:COH) – Buy
We think debt-free COH is going places. Fiscal 2011 was an outstanding period for Cochlear, and with the stock having sold off heavily since early April as a result of concerns over the high Aussie dollar, we believe the market is now under-rating COH’s potential given their prospects for growth. We have raised our share price target from $71 to $75. Cochlear is a defensive stock and it dominates the hearing aid implant market with a 70% share, allowing it to shape the market to its advantage.
Iluka Resources Ltd (ASX:ILU) – Buy
The recent fall in ILU’s share price is overdone because ILU is still selling zircon at high spot prices and we see no foreseeable weakness in demand. We’ve run our valuation model using both spot and long-term prices as a proxy for best and worst case scenarios and we believe the recent negative sentiment has provided an attractive entry point for ILU. Strong mineral sands pricing will likely bring on new supply from other miners. But, this ramp up will take some time to flow through, allowing ILU to capitalise on higher prices in the short to medium-term. Our share price target is $21.10.
Woodside Petroleum (ASX:WPL) – Buy
At the current share price, we now believe Woodside is oversold and we’ve upgraded it to a ‘buy’ with a target share price of $41.90. WPL will be reporting its first half-year earnings results on Wednesday and we estimate an underlying new profit after tax of US$742 million, a 9% reduction from a year ago as a result of higher exploration and evaluation expense. We believe fundamental value exists in WPL’s pipeline of growth projects. While cost overruns and delays are inevitable, we think these have largely been captured in our valuation and priced in by the market.
Also in the latest Switzer Super Report:
- Peter Switzer: I see strong positives beyond the fear
- Tony Negline: Six tips for managing your pension
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