Agri tumbles, but remains in top three market performers
20 August 2008
Australia’s listed agribusiness sector has delivered its third consecutive month of negative returns and is starting to realign itself with the broader market. However, despite this continued decline, the sector is still one of the market’s strongest performers year-on-year and its outlook for the coming 12 months remains very positive.
According to the August Commonwealth Bank Agri Indicators Report, the agri sector has shed 8.8 per cent of its value over the past month, whilst the S&P/ASX 200 accumulation index has experienced a slight recovery with gains of 1.6 per cent in the same period.
Despite this recent decline, the sector has experienced a stellar run over the past 12 months, reaping investors returns of 9.3 per cent and outperforming the broader S&P/ASX 200 index by more than 20 per cent. Looking ahead, the consensus forecast for agri remains at 37 per cent – 13 per cent more than the broader market.
According to Jon Sutton, Executive General Manager, Commonwealth Bank Agribusiness, the agri sector is now experiencing similar conditions to those which have been plaguing the S&P/ASX 200 over recent months.
"The broader market has been suffering from extreme levels of volatility for some time now and this has prevented a return to fundamentals. The agri sector has followed a similar trend over the past few months and as a result has given up a lot of its gains.
"Volatility in the sector is currently higher than the broader market, but it isn’t as high as the financial, property and materials sectors."
Mr Sutton also noted the further drop in exuberance over the past month, suggesting that the sector is currently trading at a large discount to its underlying fundamentals.
"The agri sector is currently very under-priced and this may give rise for potential buying opportunities. However, investors should proceed with caution given the elevated levels of volatility.
"Looking ahead, the future does remain bright for the sector. We are already half-way through the company reporting season and have seen no significant earnings downgrades – on this basis, the forecast returns are healthy and the sector is tipped to be the third best performing sector on a risk-adjusted basis in the coming year after energy and materials."
According to Mr Sutton, the sentiment within the broader farm industry and at the farmgate is one of optimism.
"Conditions in Western Australia are looking good, but across the Eastern Seaboard, a lot hinges on the outcome of spring rains to ensure successful cropping.
"The recent fall in the Australian dollar will assist the pastoral industry and will also help beef exports to be more competitive in key markets, which have slowed in the past six months," Mr Sutton concluded.
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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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