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From Australia to China, the US to the UK, most major economies missed expectations last night and saw the MSCI emerging markets index hit a four-week low, the S&P to a two-week low, with the DOW not far behind.
It is not what you would call a positive start to the year; there are some interesting stats emerging about the start of 2014. In 2012 and 2013 the S&P never closed down on a year-to-date basis; in 2014 it’s never traded up on a year-to-date bases. AAPL has just fallen for the first two days of the year - this is the first time it’s done this in its public listing history – all suggest weakness.
I am not overly concerned by this; January is (historically) the lowest trading volume month of the year and the globe has just seen a pretty tidy three week rally that pushed most markets back towards or above their 2013 highs.
However, what I want to see over the coming eight weeks (US earnings season and Australian earnings season) is whether or not the multiple expansions over the past 18 months are justified.
There is general cautiousness across the analytical world at the moment; momentum is certainly a pull factor, as investors and the street are getting very excited about the returns seen over the past two years. However, the cautiousness in the equity is for a need to justify price.
Revenues must return in 2014; there is only so much ‘streamlining’ companies can undertake. In 2013 earnings and profit actuals beat estimates by just over 52% of the time; revenues however where well short of expectations, with only 34% of companies beating.
Currently over 25% of companies listed on the ASX 200 are trading above their consensus 12-month price targets; nine of them are over this figure by 10% or more. This means a quarter of the market is expected to fall sometime in the next 12 months.
Now, providing these targets are realistic come the start of earnings season (if these companies cannot justify the lofty prices on offer with better-than-expected results and earnings that will catch up to the P/E expansion), we may see a correction to start 2014 and further questions will be raised about the earnings abilities of certain sectors of the market.
Like 2013, this year will be a stock pickers market rather than a basket of stocks market. There is plenty of value out there you just need to look carefully as to where the value is coming from.
It is for this reason I expect tepid trading for the next four weeks as fund managers to retail investors assess the mood of the markets pre and post half year earnings seasons before markets move in either direction.
Ahead of the Australian open
Today sees the release of the November trade balance at 11:30am AEDT. It will give an insight as to how the record shipment numbers from Port Headland are translating. Exports are expected to have risen in November and should see a narrowing of the balance to a $300 million deficit from a $530 million deficit in October. Watch the AUD crosses, particularly AUD/JPY and AUD/NZD, as both will move harder than the traditionally watched AUD/USD, and should provide better trade value.
Ahead of the 10:00am AEDT bell we are calling the ASX down two points to 5323; however this is likely to move lower still on the open of Japan and China. The Nikkei is currently pointing down 1.1%, and has been a good gauge of how the local market will perform in the afternoon.
BHP’s ADR is suggesting the stock will lose ground, however the trade balance is going to be a better gauge of the material spaces today. Any positive from the export component will benefit the likes of FMG, AGO and MGX, as iron ore over the past six month has been well ahead of expectations.