Agri rallies in irrational market
18 November 2008
As our domestic markets continue to wear the effects of global financial uncertainty, there is a glimmer of hope for Australia’s listed agribusiness sector, with data over the past month recording an upturn in performance.
According to the November Commonwealth Bank Agri Indicators Report, the agri sector has seen a swing back into positive territory during the month to 11 November to deliver investors gains of 0.7 per cent, just above the S&P/ASX accumulation index which gained 0.6 per cent.
However, with fear still gripping all sectors in the market, agri stocks continue to experience extreme levels of volatility and remain severely underpriced.
Jon Sutton, Executive General Manager, Commonwealth Bank Agribusiness, said, “The slight gains recorded for agri over the past month are encouraging. Although the sector has had a difficult 12 months it has still managed to outperform the broader market by more than 10 per cent over the same period.
“Earnings prospects for the coming year remain very strong in excess of 30 per cent, but new investors should proceed with caution. The market is still trading irrationally and little value is being placed on the fundamentals.
“There is no way to predict short term outcomes, but we do expect the market to return to order at some point – when, we cannot say, but eventually it will. The only recommended strategy for now is to look long-term, watch the real changes that are occurring across our economy and expect the unexpected.”
The strong outlook of the rural sector has also been reinforced in the Reserve Bank of Australia’s (RBA) latest statement on monetary policy. The RBA announced it expects the rural sector to grow faster than the rest of the economy with the anticipated farm output stronger than non-farm growth in 2009. According to Mr Sutton, this is another piece of good news for investors and primary producers alike.
The sentiment at the farmgate does however remain mixed, especially among those farmers involved in the current wheat harvest.
“The harvest is now well underway and although there has been some variability in production between the states, at a national level the crop is coming in very well and farmers are receiving good yields and high grades for their wheat.
“The silos are filling up and the anticipated logistics issues are just beginning to surface. Growers may still have some reluctance to price their grain now in the hope of getting a better price post harvest, but they still want to get it out as soon as possible.
“On the global market, the USD price of wheat has probably hit its lowest point and the AUD price has rallied slightly in light of this over recent days. Overall the situation is looking positive for our grain exporters,” said Mr Sutton.
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Notes to editors:
i. About the Commonwealth Bank Agri Indicators Report
The Commonwealth Bank Agri Indicators is created around three 12 month forecasting models – Fundamental Return (consensus forecasts of earning and dividends for individual stocks in the sector), Exuberance (proprietary measure of market mis-pricing), and Volatility (derived from proprietary methods of modelling realised volatilities, detecting changes in long-run levels and correcting for switchbacks and other correlation patterns in the data).
The Commonwealth Bank Agribusiness index measures the performance of the Commonwealth Bank defined ‘Agribusiness’ sector over time. The Commonwealth Bank Agribusiness sector currently consists of 16 rural-dependent companies: Australian Agricultural Company Limited (AAC), ABB Grain Limited (ABB), AWB Limited (AWB), Futuris Corporation Limited (FCL), Forest Enterprises Australia Limited (FEA), GrainCorp Limited (GNC), Gunns Limited (GNS), Great Southern Limited (GTP), Incitec Pivot Limited (IPL), Nufarm Limited (NUF), Primeag Australia Limited (PAG), Ruralco Holdings Limited (RHL), Ridley Corporation Limited (RIC), Select Harvests Limited (SHV), Tassal Group Limited (TGR), Timbercorp Limited (TIM). Companies previously included in the sector but since removed due to delisting or exiting the All Ordinaries index include Queensland Cotton Holdings Limited (QCH) and Auspine Limited (ANE).
The Commonwealth Bank Agribusiness index is a non-float adjusted, market-cap weighted index constructed using the same methodology as the S&P index series. To be considered for inclusion in the index, each stock must be a in the All Ordinaries index. The Commonwealth Bank Agribusiness index begins on 3 April 2000 which is the same date as the launch of the S&P/ASX index series in Australia. At inception there were 8 stocks included in the index. This number is currently 16.
The Commonwealth Bank Agri Indicators should be used as a guide only to the performance of the Agribusiness sector, as a way to measure its performance and potential return over the coming months and year.
The Commonwealth Bank Agri Indicators report is attached.
This report has been prepared without taking account the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice. Past performance is not a reliable indicator of future performance. Commonwealth Bank of Australia ABN 48 123 123 124, AFSL 234945. A full copy of the Agri Indicators Report can be obtained by contacting our AgriLine on 1300 245 463 7am to 7pm (AEST time), Monday to Friday.
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