Market remains at records despite political risk

Macro news varied across the Atlantic overnight. With the US closed for Presidents’ Day, no news came from the west. However, Greece walked away from talks with EU finance ministers, leaving it teetering on the edge.

Source: Bloomberg

The Greek delegation is reported to have lashed out at the current deal. An emailed statement from a Greek official labelled the current proposal ‘unacceptable’ and ‘absurd’, accusing Chairman Jeroen Dijsselbloem of backtracking. The talks end fairly abruptly in stalemate – the next scheduled meeting is currently scheduled for 28 February, a day before it is believed Greece will run out of money. However, a new emergency meeting is now scheduled for Friday.

Once again Europe will remain an overarching risk story for investors - from a strategic point of view, the default position from the EU-Greek talks is a deal, which markets will initially champion. However, the details of any deal are far from clear - signs of haircuts or indications the problem has just been kicked down the road will likely see European indices backing off from the record highs we currently see.

The other default position is that monetary policy will remain the biggest supporter of global equities, with or without Greece in the EU. However, I would have a plan for Greece exiting the EU as it will be volatile.

The reason I see it as unlikely is the political damage that would occur in the aftermath. Russia and China are watching this situation very closely and both would be in Athens very quickly to discuss how they can assist the Greeks. In the more likely scenario of Greece remaining in the EU, the question remains of whether the ECB would provide additional support, looking to provide stimulus rather than forcing further austerity?

Ahead of the Australian open

The ASX remains one of the best-performing markets on the planet in 2015, up 8.6% year-to-date compared to the S&P 1.9%. Yield stocks see the ASX stretched to multiples not seen since 2007.

So far this earning season, 34% of companies have reported. 62% of those beat the consensus estimates on the EPS line while only 42% have beaten consensus on the revenue line. What is concerning about the current multiples is that, on an aggregated basis, EPS growth compared to the corresponding period is down 4.95%.

Materials have seen a 24% decline, capital goods are down 27% and industrials have declined 43% in EPS growth. It just shows how strong the push into yield stocks has been – on current metrics, earnings season has shown that ‘below-trend growth’ is indeed a bottom-up phenomenon.  

Fifteen stocks report to the market today. Tomorrow it’s over thirty, so it will give a clearer picture of the figures above. However, considering the slide in commodities in the first half of FY15, the likelihood of a reversal of the current trend looks unlikely.

Australia & New Zealand Banking Group and Fortescue Metals will be the most watched results of the day but it is Dick Smiths and Monadelphous that may actually give us a better read on the current state of play in the local economy.

Dick Smiths has seen relatively positive quarter numbers, suggesting consumer spending is still moving and the company may give an update as to how the second half has begun in the lower interest-rate environment.

Monadelphous – one of the better providers in the mining service space – is likely to show that the downturn is not only biting, but further downsizing is likely. It would be a clear indication the mining boom is over.

We are calling the ASX down 46 points to 5843 as CBA turns ex-dividend, taking at least 13 points out of the market. The question now is how it will trade after turning ex.

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