Monday, 26 July 2010

From Gareth Stokes, MoneyWeek Online editor,

Dear Money Morning Reader,

Towards the middle of last year analysts were upbeat about prospects for local equities. They spoke with a single voice about fantastic value opportunities during the early stages of the economic recovery. But they repeated a common warning too. “If earnings don’t come through strongly in the second half of 2009, and early 2010,” they chorused, “the market outlook isn’t nearly as rosy.” As we dejectedly trace the JSE All Share index for the first half of this year we can only reflect on their ‘fork tongued’ advice. Selling a market recovery on uncertain future earnings is like selling a motor car without brakes. An important component is absent, and a crash is imminent.

A recent Credit Suisse Standard Securities (CSSS) commodity price review casts serious doubts on the earnings potential of one of South Africa’s largest diversified miners. They’ve slashed their full year earnings forecast for BHP Billiton by 4% in FY2010, 16% in FY2011 and 12.5% in FY2012. And – given the chunk of future profits they’ve yanked from the table – it comes as no surprise Billiton’s rating has been slashed from Outperform to Neutral. CSSS re-rated the counter following a review of the mediumterm prospects for commodity prices.

Why the long face? The primary concern for Billiton is the expected 18% reduction in iron ore prices for 2010 (down to $106/ton). Prices are expected to slide further in 2011 too – to a mere $104/ton. Whatever you do – don’t point this out to Arcelor Mittal. Copper prices are trending softer too – but should only contract 5% to $3.15/lb next year. The second ‘negative’ centres on  regulatory changes in the Gulf of Mexico. It’sfar removed from South Africa – we agree –  but one of the risks of being truly diversified. The third ‘red flag’ relates to the European Commission reluctance in approving a major iron ore joint venture. Billiton will have to explore more expensive iron ore expansions if the JV fails.

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Should investors dump their Billiton exposure? CSSS thinks not… If the much talked about ‘double-dip’ recession occurs they believe the share affords the “best [possible] defensive materials exposure thanks to its strong balance sheet and diversified earnings profile.” Billiton boasts an impressive split of projected FY2011 earnings as follows: iron ore 29%, petroleum 20%, base metals (copper) 20% and metallurgical coal 15%. You should, however, pick up on the warning contained in their ratings downgrade.

The analysts are starting to reduce earnings expectations at some of the country’s most efficient operators. If this trend continues – and filters into the financial and industrial sector – we could certainly face a short-term correction in local equities. Who knows! You could look at the Business Day three weeks from now and find the All Share perilously close to its strongest support, around 26 000 points! If the index collapses to this level you’re going to want to remain in the defensive shares MoneyWeek SA has been punting throughout 2010. 

But if you’re prepared to risk a few rand on the ongoing economic recovery, you might be tempted to consider growth over value. David Stevenson and James McKiegue investigate the latest profit opportunities in the global telecoms space. Turn to page 16 and we’ll throw in our assessment of South Africa’s largest listed telecoms opportunities too.

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Market update

The JSE all share index advanced 0.53% yesterday. The gold mining index slipped 0.95%. Resources added 1.63%. Banks and financials grew 0.8% and 0.57% respectively. Industrials bounced 0.42% and the platinum mining index jumped 1.39%.

London's FTSE100 shed 1.19%. The Dow Jones collected 0.99% and the Nasdaq closed up 1.05%.

Tokyo's Nikkei gained 2.28%. Hong Kong's Hang Seng added 1.1%.

Brent crude is currently trading at $77.63 per barrel.

Spot gold's trading at $1,191.96 down 0.35% and platinum was last quoted at $1,543.00.

And here's how the rand is performing against the major currencies:
R/$ 7.43
R/₤ 11.47
R/€ 9.59

Click here for the latest stock market news and charts.

More Money Morning classics and recent rants...

Take a look at some of our most popular past articles:

Britain’s banks face a cash drought...
Where to next for gold?
The shares you’ll never want to sell...

Email me and let me know which articles are your favourites. matthew@fsp.co.za

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MoneyWeek Online has a proven record of spotting investment opportunities and dangers, showing our readers exactly how to protect themselves and profit. Did you know that you can have immediate online access to MoneyWeek Online? You will qualify instantly to receive 3 risk-free issues...Don't miss out visit www.moneyweekonline.co.za

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