Two bits of information best sum up the stockmarket disaster that was 2007-08 and give a clue as to what lies ahead.
Specifically there’s been a sharp downturn in the number of new floats on the ASX in the six months to June, and the total value of Australia’s superannuation assets is now below the value they were a year ago at June 30, 2007.
In fact both reflect what’s happening in the stockmarket,and what investors think will happen in the wider economy as the year goes on: the battle between inflationa nd growth will be the big story. Controlling inflation will be the aim of the authoritiesm at the expense of growth, earnings and returns.
So far we’ve seen the damage done from the correction in asset values, now comes the damage to earnings from slowing sales and rapidly rising costs. It’s going to be the big message of the next 12 months.
Already the damage to super fund assets could be of the order of $100 billion or more by the end of this month and that doesn’t include the billions of losses from the collapse of several hedge funds, the losses by market traders and the losses incurred by forced margin calls or sales or the losses incurred by the various companies.
Another indifferent year of market performance will mean more pain for super funds and their investors.
Allco for example will be writing down the value of its intangible assets by around $1.3 billion, write-downs and provisions in the listed trust sector is running at around $2 billion with big losses expected from Mirvac, Valad, APN/UK, Babcock and Brown’s investment satellites, some of Macquarie’s, Transurban and others. Centro’s losses are likely to be of the order of $1.5 billion or more.
These losses have fed through into the asset values of super funds large and small, DIY and corporate, and they will feed through again in the new financial year as the accounting and restructuring accelerates.
When Australian mainstream banks like the NAB, CBA, ANZ and Westpac can trade with a dividend yield of 6% to more than 7% (and over 9% on a fully imputed dividend basis), the market slump has left investor confidence in tatters.
It has only been two solid days of rises Wednesday and yesterday that saw the likes of the CBA and NAB enjoy share prices rise large enough to drop the dividend yield under 7%. The ANZ is still over 7%. Shares will fall sharply today after Wall Street’s 3% slump overnight.
On a full grossed up basis the banks are all on a dividend yield which is more than what they are currently offering for some term deposits which is around 7.5% to 8%.
The plunge in the value of the banks (by more than 30% in most cases, and more) is why the market is off by around 13%-14% from last June; but as the banks really fell from January onwards, it’s why the market is down more than 20% from its peak in November.
That does mask the big correction last August-September when the credit crunch broke, to around 5,790 points, before it drove more than 1,000 points higher to peak in November, powered by the BHP Billiton move on Rio Tinto.
But as the crunch returned in force from late that month, our market tumbled lower through December as Centro led the growing group of higher leveraged companies to be exposed by the full impact of the crisis.
The All Ords hit a low below 5,200 in March as Bear Stearns was saved in the US by the Fed, then followed American markets higher, to peak just above 6,000 in mid May when soaring oil and food prices finally caught the attention of central banks, mainstream commentators and investors, and the current sell off started.
Despite some recent weakness, resources remain the mainstay of the market: if they had been weak as well, we would now be in a fully fledged bear market.
You can argue that the market is ‘only’ down 13% to 14% from a year ago because of the BHP takeover for Rio, the big coking and thermal coal price settlements and above all the huge rise in iron ore prices and the growth of the sector, led by the likes of Fortescue Metals.
This resources boom (with an oil and energy overlay) will help the market through the first half of 2008-09 but from January next year, it will start to get stale as the non-iron ore and coal miners report average to disappointing results.
But by that time industrial shares might be looking to recover and the banks may be stronger, having shaken off the bad debt worries when they report their full year figures in October and November.
But there is a lot of ground to make up. Superannuation returns for the year to June will be bad: the worst for 25 years according to some commentators, with negative returns commonplace and positive returns very rare.
The extent of the damage can be seen from figures released yesterday by the industry regulator, The Australian Prudential Regulation Authority (APRA).
Its Quarterly Superannuation Performance publication for the March quarter of 2008 shows total superannuation assets over the 12 months to 31 March 2008 rose by $37.4 billion (3.5% to a total of $1.10 trillion, despite a fall of $74.9 billion (6.4%) during the March quarter. That is, the gains in the June quarter last year, into the September three months were still enough to offset the losses in the December and March quarters.
APRA said the March 30 asset figure was lower than the $1.14 trillion figure at the end of June 2007. That figure was up a huge $225.4 billion in 2006-07. The financial year now coming to a close will be a very different story.
APRA said that over the March quarter, industry funds’ assets fell by 4.8% ($9.9 billion) to
