Agri holding up despite rising market pressures
22 July 2008
Australia’s listed agribusiness sector has started to feel the pressures plaguing the broader market, recording another month of negative returns. However, despite its recent poor performance, the sector still maintains its stronghold as one of the market’s top performers.
According to the July Commonwealth Bank Agri Indicators Report, although agri fell -9.2 per cent over the past month – just lower than the S&P/ASX 200 accumulation index at -10.2 per cent – its year-on-year performance was stellar, reaping investors returns of +13.7 per cent. This compares to a dismal -21.5 per cent across the broader market.
Agri was also one of only three sectors that managed to record positive growth over the period – the others being energy and materials. Looking ahead to this financial year, agri remains one of the best sectoral bets on a risk adjusted basis, with returns expected to be around 36 per cent.
Jon Sutton, Executive General Manager, Commonwealth Bank Agribusiness, said, "After two months of elevated exuberance, the cooling off in the agri sector over the past month is broadly in line with analysts’ expectations that it would correct itself to fair pricing.
"The good news for investors looking to enter the market now is that the sector has actually been slightly over-corrected. Agri stocks are currently underpriced by -8 per cent and generally good value."
Mr Sutton also stressed that all investors should be aware of the high level of volatility in the sector, which remains as high as the S&P/ASX 200 at around 20 per cent.
"Over the past three to six months agri has attracted much interest from local and global investors and this surge of money has seen stocks rally hard and led to high levels of volatility. Volatility isn’t new to the agri sector – and it isn’t as high as sectors such as finance and property – however, investors should be aware that it is still inflated and brings an additional element of risk to any investment."
According to Mr Sutton, the sentiment at the farmgate is tentative. In Western Australia recent rains have improved the prospects for the winter crops, but some follow up rains are still needed across the Eastern Seaboard.
"A good harvest would help to bolster the confidence of our primary producers and ultimately boost investor confidence – the next few weeks will be critical," 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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