Australian Stocks Post Best Quarterly Gain Since 2009 on Rates

Australian stocks posted the biggest quarterly gain in four years as record-low interest rates boost profits. AMP Capital Investors Ltd. and Equity Trustees Ltd. see the rally continuing through 2014.

Australia’s S&P/ASX 200 Index surged 8.7 percent this quarter, the steepest advance since the three months ended September 2009. It will rise 12 percent to 5,950 by the end of 2014 as earnings expand on anticipation of faster economic growth, said George Boubouras, of Equity Trustees Ltd. The local market will surpass returns from U.S. shares in the next 12 months, according to AMP Capital Investors Ltd., a unit of the country’s largest publicly traded asset manager.

The Reserve Bank of Australia cut its benchmark interest rate to a record low last month and signaled it’s willing to reduce borrowing costs further to weaken the currency and spur expansion in the $1.5 trillion economy. Stocks also rose as business and consumer confidence jumped to the highest level in at least two years ahead of Tony Abbott’s Liberal-National coalition election victory on Sept. 7.

“We’ll be seeing a reacceleration of earnings with interest rates lower for longer and a lower Aussie dollar, all supportive for equities,” Boubouras, who helps oversee $30 billion as chief investment officer at Equity Trustees in Melbourne, said in a telephone interview on Sept. 23. “We’ll get to 5,950 by the end of next year without any problem.”

Earnings Multiples

Australia’s benchmark equities gauge traded at 15.5 times estimated earnings on Sept. 27, compared with 15.4 for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The Australian measure will beat the S&P 500 on the quarter for the first time since December 2012, with the U.S. benchmark rising 5.3 percent through Sept. 27.

The Australian’s currency’s 10 percent slide against the dollar in the six months through Sept. 27 has boosted Australia & New Zealand Banking Group Ltd., the nation’s third-largest lender by market value, and Navitas Ltd., a provider of education services, as profits increased once repatriated. Both firms get more than 28 percent of sales outside Australia.

Central bank Governor Glenn Stevens said last month that a weaker Australian currency would help an economy set for its slowest expansion in four years. Growth will slow to 2.25 percent this year, the central bank forecasts, before rebounding to 2.7 percent in 2014 and 3 percent in 2015, according to the median estimate of strategists surveyed by Bloomberg News.

RBA policy makers have cut the benchmark interest rate by 50 basis points this year to 2.5 percent, reducing it by a total of 2.25 percentage points since November 2011. They will review the rate tomorrow, with all 33 economists surveyed by Bloomberg News forecasting no change.

Confidence Returns

A Westpac Banking Corp. and Melbourne Institute survey released Sept. 11 showed consumer confidence jumped this month to the highest level since December 2010. A National Australia Bank Ltd. survey released a day earlier showed business confidence surged to the highest level since May 2011, with sentiment increasing in all industries.

“The prospects for the relative outperformance of Australian shares has improved,” Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages about $130 billion, said in a telephone interview on Sept. 26. “There’s a window that Aussie shares can outperform, and that’s being driven by interest rates that are really coming down here. And on top of that, you’ve had the falling dollar. So financial conditions have eased considerably.”

Biggest Gains

Raw-materials and energy companies posted the largest gains among the 10 industry groups on the S&P/ASX 200 during the quarter amid an increase in economic growth forecasts for China, the biggest buyer of Australia’s minerals. Both sectors rose more than 14 percent. BHP Billiton Ltd., the world’s largest mining company, climbed 13.9 percent this quarter and Woodside Petroleum Ltd., Australia’s second-biggest oil producer, gained 9.4 percent.

In the U.S., the S&P 500 fell for five days after reaching a record 1,725.52 on Sept. 18, its longest slump of the year, amid concern a government shutdown will curb economic growth. The measure will climb 8.9 percent from its Sept. 25 close to 1,844 by the end of 2014, according to the average estimate of eight strategists surveyed by Bloomberg News.

Even as confidence rebounds, Australian companies are shedding staff in a potential threat to economic growth. The nation in August recorded its first back-to-back monthly jobs loss in more than two years, while the unemployment rate rose to a four-year high of 5.8 percent, according to the statistics bureau.

Telstra Corp. plans to cut 1,100 jobs, or about 2.9 percent of its workforce, by June 2014, Australia’s biggest phone company said Sept. 26.

Uncertain Outlook

“Companies are uncertain,” Olivia Engel, head of active Australia equities at State Street Global Advisors Inc. in Sydney, said in an e-mail Sept. 24. “They are not expecting the economy to provide any growth opportunities.” State Street manages $2.1 trillion globally.

Earnings-per-share on Australia’s S&P/ASX 200 index will increase 12 percent in the 2014 financial year, according to estimates from Perpetual Investments, a Sydney-based asset manager. That would beat the 5.7 percent prediction for U.S. companies on the S&P 500, according to forecasts compiled by Bloomberg.

Chinese Manufacturing

A Chinese manufacturing index increased to a six-month high in September, adding to signs of a rebound in the economy that is Australia’s biggest trading partner. Goldman Sachs Group Inc., Credit Suisse Group AG, Deutsche Bank AG and JPMorgan Chase & Co. have all raised economic growth projections for China.

“There is little doubt that better data from Australia’s major trading partners, combined with Tony Abbott’s recent election win, has culminated in higher consumer and business confidence,” said Matthew Sherwood, who helps oversee about $25 billion as head of markets research in Sydney at Perpetual Investments. “Australian earnings growth has got to come through to give the domestic market a further substantial lift.”

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