Agribusiness investors start new Financial Year with caution
Tuesday 28 July, 2009: The listed agribusiness sector started the new Financial Year in negative territory, positing its first loss after three months of positive returns, as investors showed caution when entering the market, according to recently-released data by the Commonwealth Bank.
The Commonwealth Bank Agri Index recorded negative growth during the past month, delivering a loss of 15.0 per cent over the month, while the S&P/ASX200 index reported a loss of 4.6 per cent over the same period.
Brendan White, Executive General Manager, Commonwealth Bank Agribusiness said the Agri Index’s move into negative territory is in line with volatility the market had been expecting.
“The performance of the listed agribusiness sector this month is not unexpected. In times of economic downturn, investors will always remain cautious and this month’s results are indicative of their prudent approach.
“In addition, two of the largest companies that make up the Agri Index had their earnings downgraded, significantly impacting the performance of the sector,” he said.
ABB Grain Limited (ABB) and Nufarm Limited (NUF) had their earnings downgraded during the past month. Currently, ABB accounts for 15.3 per cent of the Agri Index, with NUF accounting for 18.8 per cent. Another factor contributing to the Agribusiness index overall performance this month was the decline in Incitec Pivot Limited (IPL)’s share price falling by 21 per cent.
“The Agri Index is heavily dependent on the performance of these companies and as such the current results are not surprising,” he said.
However, this month’s short-term loss is buoyed by a more favourable long-term forecast for the agribusiness sector.
“The consensus forecast return for the year to July 2010 is 9.9 per cent. This is an increase in the forecast from last month and represents improvement across the board of forecast returns for key companies in the sector,” Mr White said.
On a risk-adjusted basis Agribusiness continues to be middle of the pack – in line with the expectations for Consumer Discretionary and Consumer Staples.
Mr White commented that “Agribusiness is expected to outperform Financials, IT, Property, Materials, Energy and the broader market based on forecast returns for the next 12 months.
“Although we’ve seen investor confidence slip this month, the sector’s historical performance is evident of its ability to withstand short-term blows. Consensus view is that it will ultimately regain wealth in the longer term.
“Undoubtedly we can’t ignore this month’s decline. However, the fundamentals of agribusiness are solid and over time we should see investor confidence lift, resulting in more positive returns for investors.”
Mr White also reiterated to investors that forecast volatility for the listed agribusiness sector remains elevated.
“The July Agri Indicators Report confirms the uncertainty in the Agribusiness sector remains high. Forecast volatility in the sector is 29 per cent for the next 12 months therefore investors entering the market in the coming weeks should do so cautiously,” he added.
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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 14 rural-dependent companies: Australian Agricultural Company Limited (AAC), ABB Grain Limited (ABB), AWB Limited (AWB), Elders Limited (ELD), Forest Enterprises Australia Limited (FEA), GrainCorp Limited (GNC), Gunns Limited (GNS), 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). Companies previously included in the sector but since removed due to delisting or exiting the All Ordinaries index include Queensland Cotton Holdings Limited (QCH), Auspine Limited (ANE), Great Southern Limited (GTP) and Timbercorp Limited (TIM).
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 14.
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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