A comment on Aussie equity markets

Equity markets around the world have fallen dramatically over the past week as fear of the next financial disaster or just fear of the pure unknown has taken hold.  I have no idea what will happen or how long the current crisis will prevail - indeed I am unconvinced anyone does - but I have a few tentative ideas about the current situation at least with respect to equity markets.

The collapse of the Australian dollar and the collapse of Australian export-oriented resource stocks do not make a lot of sense taken together.  The Australian economy seems in much better shape than most other developed economies and, at the present time, our financial system seems sound.  It is difficult to believe that the main sources of demand for our coal, iron ore and food exports will dry up and there has been some relief from the drought.

Consider a stock like BHP-Billion which at $27-74 is now priced at 9.7 times earnings.  Its share price high for the year was just on $50.  It is true that its export prospects have dimmed somewhat with the likely future global recession but the destination of most of its exports remains in the high growth parts of Asia where recession is unlikely.  The price in US dollars of these exports would need to decline by a little less than 1/3 to match the improvement in returns in Aussie dollars that will result from the vastly devalued Australian dollar which has fallen from 98 to about 65 cents US.  And if this reduction in 1/3 did occur that would restore the Australian dollar earnings of this exporter. There would be no further implied need for a fall in the Australian dollar price of the stock of the type that has occurred. I cannot help thinking that (further financial disasters excluded) this stock is massively oversold.

Indeed, looking through the industrial and mining stocks I see a fair bit of apparent value in many places.  Rio Tinto is selling at 8 times earnings and looks even cheaper than BHP-Billiton - an additional bonus is that, if BHP-Billiton's takeover of Rio Tinto does go ahead, it is a cheap way of getting into BHP-Billiton since the target is currently trading at a discount to the takeover offer.

Much the same sorts of observations can be made about the prospects of listed beef and food exporters. They look very cheap at current prices and would seem to have tremendous medium to long-term prospects.

Boring though hopefully safe income yielding stocks like Telstra (13X earnings) at $3-90 and AMP (12X earnings) at $5-89 are yielding around 8% when interest rates look like falling to around 5% over the next few months.  There are plenty of other stocks in similar situations.  Again very cheap.

I am not suggesting anyone hops in and starts buying - I'd definitely at least wait until the market heads out of its current nosedive before doing this.  But I wonder if because I can see real value emerging in the market at present that others might be doing the same. Barring further financial shocks and disasters - OK these do seem reasonably prospective - greed and self-interest should start to drive a recovery in what seem to be very undervalued Australian stocks.