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FNArena editor Rudi Filapek-Vandyck shares his views and insights on irregular basis with subscribers. Occasionally, these views are made accessible to non-paying members and readers elsewhere. This story was originally published on Wednesday, July 07, 2010.

By Rudi Filapek-Vandyck
Has anyone else picked up that shares in ResMed ((RMD)) have gained around 12% since the Australian share market peaked in mid-April?
Yes, that is correct. While broad market indices lost circa 16% in a little less than three months, and with many stocks suffering even larger losses, ResMed shares have actually gained more than 10%.
There are a few more reasons why ResMed currently sits above others in the Australian share market: despite this strong performance, and why securities analysts remain positive on the shares, with apparently no reason to lower earnings estimates.

Current consensus sees ResMed growing earnings per share by more than 21% in fiscal 2011. This is well above the market average, considering current consensus for ASX200 companies overall is some 19% growth, but that number is pumped up by big leaps forecast for BHP Billiton ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and other resources companies.
If we stick to industrial companies only, the projected growth rate lies closer to 12%, so ResMed is effectively beating the rest of the market (ex-miners) by half (more or less). And even then, the consensus price target for the shares is still some 16% above the share price.

Would you believe, there is still more good news to tell about ResMed. At a time when nervous investors are watching price charts for the ASX200 and the All Ordinaries, and leading indices in the US, for any clues whether a head-and-shoulders pattern will be confirmed, or whether the Black Cross will be followed through, ResMed shares look solid and healthy on price charts too.
As I pointed out in my story on healthcare stocks last week, and again in my Weekly Insights story on Monday, ResMed shares are still trading above their 60 daily moving average (M/A), and the 60 M/A is still well above the 200 M/A.

If there is one healthy looking stock in the Australian share market at this point in time, surely that stock is called ResMed.
Before we go any further, let's recap all of the above main characteristics about what makes ResMed such a standout, because that will help us in looking for similar examples elsewhere:
1.ResMed shares have risen while others have plummeted
2.Consensus expectations are for solid, strong growth in fiscal 2011
3.Stockbroker price targets are still well above the present share price
4.The share price is (just) above the 60 M/A
5.The 60 M/A is (well) above the 200 M/A

In my Weekly Insights on Monday I reported 120 out of the top 200 ASX-listed companies have now put a Black Cross on price charts (when 60 M/A decisively falls below 200 M/A). I estimate there are around 35 others who are either close or on the verge of generating a Black Cross, so this automatically leaves a small group of ASX200 members who could potentially share the main characteristics of ResMed.
Long story cut short: further analysis has generated a list of 17 stocks that look healthy on characteristics 4 and 5 (the two trendlines). Of these companies, three are take-over candidates (Lihir ((LGL)), Centennial Coal ((CEY)) and Healthscope ((HSP)), and five others are gold miners (Avoca ((AVO)), Eldorado ((EAU)), Kingsgate ((KCN)), St Barbara ((SBM)) and Independence Group ((IGO)).

The latter group of stocks deserves some extra attention: many an investor in the Australian share market has been frustrated over the past few years by how gold in USD made some hefty advances, but because the Australian dollar did so too only a trickle of the gold bull market was felt by Australian gold miners.

Everybody keeps on talking about gold hovering near all-time highs, but in effect the gold price in USD hasn't gone anywhere since early December last year. The price today is effectively still at the same level as back then.

However, the Australian dollar has made some significant retreats over the past nine months and this now sees Australian goldminers outperforming the rest of the pack in the share market. Just goes to show, investing in gold exposure in Australia is a little more complex than in the US.

A special mentioning goes out to characteristic number 3: the intrinsic valuation of the stock.
Those who have been reading my analysis over the years know that I am a big fan of consensus price targets. My survey this week has again strengthened my view on the value of these consensus targets. Several stocks that equally looked good on charts as ResMed and whose share price equally displayed strong performance, have fallen from grace towards the end of June/early July.
Examples are Iress ((IRE)), Seek ((SEK)), Cochlear ((COH)), Seven ((SEV)), Invocare ((IVC)) and The Reject Shop ((TRS)).

Why have these stocks not been able to continue following the example set by ResMed? Because they had become too expensive. Without one single exception the share prices had either exceeded consensus price targets, or came very close to exceeding these targets and obviously the next conclusion to be drawn by investors was that further upside simply was not there.
Investors might want to heed this message because two other stocks that equally look good on charts, and whose share prices have held up pretty well since mid-April, are Coca-Cola Amatil ((CCL)) and Fleetwood ((FWD)).

Fleetwood has bounced off the $10 mark (consensus price target $9.71) but I suspect the shares will find solid support around the current price level of around $9.24 because of the implied 7.7% dividend yield on FY11 consensus estimates.

Special note: my survey has shown that other stocks with even higher implied dividend yields have not equally held up as well as Fleetwood. This is, in my view, a strong message from the market. Investors believe there is little risk to pay-out and earnings projections regarding Fleetwood. Obviously, they don't think the same when it comes to those other companies. But at $10, Fleetwood shares become too expensive nevertheless.

The other stock, Coca-Cola Amatil, is in my view in danger of becoming the next stock to temporarily fall from grace. This is because the share price recently touched $12 (a few times) and the consensus price target is only $11.37.

Even if these targets prove too conservative, which would imply securities analysts will have to raise their forecasts instead of lowering them as they will be doing for most other stocks in the weeks ahead, it still seems like this stock has arrived at full value at this point in time.

Note that Coca-Cola Amatil shares are trading at circa 16 times projected EPS for FY11, while consensus growth is above 9%. Seems a bit rich, doesn't it?
This leaves us with the remaining seven stocks, of which ResMed has already been discussed. So that leaves us six.
Here are my thoughts (in no particular order):
Amcor ((AMC)); after spending years in the doghouse, the market is clearly expecting a turnaround in the company's fortunes. Recent acquisitions, including Alcan's US Medical Flexibles, suggest future earnings growth could be strong.
Consensus projections see Amcor's EPS jump by some 38% in FY11 and I think the fact that the share price has held up this year is a sign that investors are again warming towards the stock.
Consensus price target is $7.30, still more than 10% above the current share price, so value isn't an obstacle.
Australian Agricultural Co ((AAC)); clearly investors are taking a positive view towards a pending turnaround for this company too. Securities analysts believe the operational environment for the company should only improve from here on. The price chart clearly show a “Golden Cross” – the exact opposite of the feared Black Cross.
RBS Australia, the only stockbroker in our universe who covers the stock, suggests there is upside in the order of 32% in the year ahead.
Foster's ((FGL)); similar as in the case of Amcor, I think the market is taking the view that after several dismal years Foster's fortune is about to make a U-turn. I do note that recent research reports on the company had a positive undertone if only because the market may have become too bearish on the company, which is not that strange given the track record following the purchase of Southcorp.
There is, of course, still the option of splitting beer from wine and that should attract potential suitors. I do note the consensus price target of $5.72 is not that far above the share price, which could imply further upside will remain limited in the short term.
It's either that or targets will be raised as research updates will be released because all analysts that have issued reports on Foster's recently used targets between $6.20-$6.50. Foster's price charts show a Golden Cross too.

Iluka ((ILU)); I don't exaggerate when I say “dog number four”. Clearly, investors are now banking on the fact that Iluka's fortune has finally turned the corner and recent analyst reports seem to point into this direction.
Come to think about it: Iluka's performance of an essentially flat share price over the past three months is even more impressive considering many small cap resources have fallen by 20-30%, and sometimes by more over the period.

Clearly, a strong performance is expected for FY11 and judging by recent price action, which puts the stock on a Price-Earnings ratio of 13.6 for FY11, Iluka's financial performance is expected to be even better than what consensus is already projecting.

Riversdale ((RIV)); share prices of many producers of bulk commodities have held up reasonably well, but none has been able to match Riversdale's performance. This is the equivalent of ResMed for the commodities stocks, though arguably with a much higher risk profile.

Note that the share price is well above what most securities analysts are willing to put up in terms of price targets and valuations. This is likely a difference in risk-assessment.
A lot is happening regarding the development of Riversdale's Zambeze coal project, but a lot still has to happen too. Still, this never stopped investors from embracing Fortescue well before the first shipment of iron ore was achieved. A similar attitude seems to have fallen into the lap of Riversdale.

And last, but not least, Singapore Telecom ((SGT)). This is the blank spot in my analysis. I have no idea whatsoever why SingTel shares have remained among the star performers in the Australian share market, other than that investors tired of Telstra ((TLS)) shenanigans might have decided telco-exposure is more solid and safe with the Singaporean parent of Optus.
Admittedly, projected EPS growth for SingTel is around 14% for FY11 and FY12 each, which is well above what Telstra could ever manage. There is some speculation about an increase in dividends, a float for Optus or even a capital return next year. I am not sure whether any of the above is a sufficient explanation, but 14% seems okay and so does the Golden Cross on price charts.

So here you have it, today's outperformers in the Australian share market (ASX200) consist of gold companies, former dogs that are now likely to turn around, plus African developer Riversdale and Singapore Telecom. Plus ResMed which seems on all accounts the less risky, most solid option.
Note: glove and condom manufacturer Ansell ((ANN)) could have been included in the list of 17, but since the share price is already above the consensus target, I suspect Ansell will become the next Iress, Seek or Cochlear.

FNArena editor Rudi Filapek-Vandyck shares his views and insights on irregular basis with subscribers. Occasionally, these views are made accessible to non-paying members and readers elsewhere. This story was originally published on Wednesday, June 23, 2010.

By Rudi Filapek-Vandyck, Editor FNArena

Something odd has happened these past three weeks. The balance between recommendation upgrades and downgrades has shifted in favour of more downgrades.

This is odd because usually there is a strong correlation between stockbroker recommendations and share prices. If share prices continue moving up, downgrades start to filter through as stockbroker price targets are reached and exceeded.

Alternatively, if share prices continue to fall there's usually a spike in stockbroker upgrades as share prices are deemed too cheap.

This time, however, the usual correlation no longer seems to apply. The first two weeks of June saw the share market bounce back from another sell-down in May, but stockbroker upgrades and downgrades remained in balance.

And now that shares are back in decline there's no predictable spike in upgrades, but instead a widening gap in favour of downgrades. In the week to Monday, downgrades were outnumbered upgrades by 29 to 12. Two days later and the balance has widened further to 31 against 7.

What's happening?

In two words: lower earnings. Back in April I observed how earnings expectations had stopped rising in Australia as downgrades and ongoing upgrades started to equal each other out for ASX200 companies. Since May, however, the underlying trend has turned negative. There are now more downgrades than upgrades to future earnings for Australian companies and the average growth profile for the market in its entirety has been on a sliding scale since.

Should we get worried?

I don't think it matters, as the market obviously already is. Every day media reports talk about widespread concerns about what might come from Europe and disappointment about what China could have done, but didn't and about US data failing to live up to the recovery promise – but falling earnings expectations… this really makes things very concrete and tangible.

All of a sudden, what seemed like an absolute bargain yesterday, looks a little less of a bargain today, despite the share price weakening, and what will happen tomorrow?

It is this uncertainty that is keeping investors on the sidelines. It is difficult to accurately gauge what the real value is of what is on offer when the trend is downwards.

This is why the upcoming results seasons in the US and in Australia will be very important. On both occasions companies will have to come up with the goods and show the market they truly can deliver on promise and potential. The Australian share market has already been hit by the first company downgrades to earnings guidance, but let's be fair, few investors will lose sleep over Sigma Pharmaceuticals ((SIP)), Elders ((ELD)) or Alesco ((ALS)). These profit warnings have nevertheless contributed to the current negative trend in earnings expectations and rating downgrades. Another contributor has been falling metals prices, with producers of zinc and aluminium in particular seeing expectations lowered as securities analysts update their models.

To put all this into perspective: in April the average growth in earnings per share for ASX200 companies stood between 5-6% for the financial year ending on June 30th. On my latest calculations, this has now dropped to 4-5%. Keep in mind this includes some heavy adjustments for the companies that have come out with profit warnings.

In other words: yes, the underlying trend is now negative, but it's not like the wheels are about to fall off anytime soon.

As far as fiscal 2011 goes, earlier projections of 20%-plus growth had already fallen below 20% in April, and that's still where they are today. (Note: this too implies a minor negative net change as comparable growth for FY10 has fallen). Again, it's not like analysts are using chainsaws these days to adjust their previous estimates, unless the company is called Elders, Alumina Ltd or Sigma.

This does not take away the fact that global economic growth is trending lower, having peaked in the second quarter, and this will no doubt keep the underlying trend in corporate earnings negative. How negative? That's something we will have to find out in the months ahead. In the meantime, the drop from 5000 to 4500 has not necessarily pushed the Australian share market into absolute bargain territory. On my calculations, the Australian share market is still valued at nearly 16 times FY10 profits; still well above its long term PE multiple of 14-14.5.

If we take guidance from FY11 consensus estimates, the market's multiple is still 13. While this keeps the door open for further upside on multiple expansion alone, it remains yet to be seen how far the multiple will rise because of falling earnings estimates (as opposed to rising prices). On my calculations, it will require a drop of 6% in average FY11 expectations to push the AX200 to a multiple of 14. In other words: the average growth in earnings per share next year would have to drop to 13% from 19% now.

As things stand right now, that seems like a big ask, especially since bulk commodities are likely to remain positive contributors for a while yet. But such a "correction" is certainly not impossible – it'll all depend on how much economies slow down in the months ahead.

(Note that falling earnings and slower economic growth usually translate into lower multiples, so investors should not assume that share markets cannot go much lower, even with earnings projections only falling slightly).

Market averages, however, only tell us a limited part of the story. Plenty of individual stocks are now trading on single digit Price-Earnings (PE) multiples based on consensus data for FY11 and these include the likes of National Australia Bank ((NAB)), Fortescue Metals ((FMG)), Rio Tinto ((RIO)), BHP Billiton ((BHP)), the regional banks and Qantas ((QAN)).

In fact, 47 out of the top 200 companies in Australia are currently trading on a single digit FY11 multiple. For some of these companies, this might prove the correct risk-reward proposition. For the majority of these companies, however, I find it hard to believe this will prove to be the case.

If we raise the bar to a maximum multiple of 11, 68 companies comply, including Telstra ((TLS)), QBE Insurance ((QBE)), Macquarie Group ((MQG)) and ANZ Bank ((ANZ)). If we raise the bar to a maximum of 12, 79 companies comply, including Commonwealth Bank ((CBA)), Western Australian Newspapers ((WAN)) and Lend Lease ((LLC)).

48 companies are expected to pay out at least 4% in dividends next year (FY11), 38 companies should pay out at least 5%, while only 28 are projected to pay out 6% or more. The latter group includes all the banks, both BlueScope Steel ((BSL)) and OneSteel ((OST)), Fleetwood ((FWD)), Downer EDI ((DOW)), Ausenco ((AAX)) and David Jones ((DJS)).

Mind you, none of the above will prevent share prices from potentially falling further, and we know that future expectations are in decline, but for longer term investors who believe that a repeat of 2008 simply is not on the cards, there should be plenty of value opportunities to pick from.

All information mentioned above about downgrades and upgrades, PE ratios, dividend yields and consensus expectations is available daily to all paying subscribers of FNArena via tools such as R-Factor, Stock Analysis and The Australian Broker Call Report.

By Rudi Filapek-Vandyck, Editor FNArena

London-based economists at Morgan Stanley were without the slightest doubt seeking to make a Big Statement on Monday when they sent out a research update to their clientele, titled "Just Say No To The Double Dip".

In the report, economists Joachim Fels, Manoj Pradhan and Spyros Andreopoulos predicted investors' angst about a potential return to the economic trough of early 2009 will prove misplaced.

If anything, argue the economists, global economic momentum in the months ahead is more likely to surprise to the upside. To add extra weight to their argument, the economists increased their global GDP growth estimate for this year by 0.4% to 4.8%, adding it would not come as a complete surprise if global growth this year ended up as high as 5%.

It goes without saying not everyone is as confident as Morgan Stanley. The RBA minutes for June, released on Tuesday, revealed RBA board members would like to be equally positive about the global economy, yet too much debt on the balance sheet of European governments is keeping financial markets on edge, with potentially negative consequences for the global economy later this year.

This is why the RBA, in the absence of a break-out in inflation, remains happy to sit on the sidelines while closely observing further developments.

Yet others dare to go a few steps further. Over the weekend, Glushkin Sheff strategist, and well-known market bear, David Rosenberg, participated in a meeting of experts organised by US investment magazine Barron's. To his own surprise, Rosenberg discovered his view about a likely double-dip recession in the US is now shared by other experts who had previously been positive about the US outlook.

My personal observation is that growth forecasts have been falling over the past weeks, in particular for the UK and for Europe, but also for China and for Australia. Most changes made were modest, but projections went down nevertheless.

It has been a similar story for corporate profits. In April I observed that profit growth projections for Australian listed companies had stopped rising as downgrades and upgrades were balancing each other out. Since then the underlying trend has turned slightly negative, without much drama, but slightly negative nevertheless.

Others have since reported a similar trend has emerged internationally.

Another reason why most investors are unlikely to take Morgan Stanley's confidence as gospel is because two leading forward looking indicators for the US economy are now firmly pointing towards a slowdown in the second half of the present calendar year.

The first one, a forward looking indicator developed by economic forecaster IHS Global Insights, has equally weakened since April, leading to a revised IHS forecast that US economic growth will hold up in the second quarter (April-June), but a slowdown will become apparent from Q3 onwards.

IHS is not forecasting any doom and gloom scenarios, but its prediction of a noticeable slowdown creates, by default, a gap with Morgan Stanley's revised expectations.

The story gets worse if we turn to the weekly updated forward looking indicator from the Economic Cycle Research Institute (ECRI). Broadly taken, this indicator has been on a sliding path since November last year and recently, economists at the Institute have started talking about a "significant slowing in U.S. economic growth in the coming months".

Similar to their peers at IHS, ECRI economists are not predicting a double-dip recession as yet, but there is no escaping the fact that the trend in their leading indicator is now firmly down.

It is this uncertainty that is at present hanging over global equity markets. Regardless of how confident economists at Morgan Stanley are in their prediction that everything will turn out just fine, the main question on investors' mind is: are economies slowing down? If so, how much will they slow down?

After all, it is the answer to this question that will determine whether equities are genuinely cheap at present price levels, or merely fair value, or worse.

Note, for example, that Yale professor Robert Schiller (half of the Case-Schiller house price index) believes US equities remain slightly overvalued, as opposed to significantly undervalued as calculated by most stockbrokers.

My best guess is that until we get a clearer picture on this matter, equity markets will remain a volatile battlefield between the bulls at Morgan Stanley and the bear at Glushkin Sheff.

Whether it be another example of “cosmic energy” or not, earlier this week I was contemplating what to include in my Rudi's View story today and I instantaneously thought about the market strategists at Deutsche Bank.

Those readers who keep track of the various market projections by stockbrokers in Australia might remember Deutsche Bank strategists Tony Brennan and Tim Baker positioned themselves at the top of market expectations earlier this year by forecasting the ASX200 would reach 6000 by year end.

As the market is now back at around 4400-something, following two failed attempts to break above 5000 in January and in April, my first thought was whether Brennan and Baker would still feel comfortable with that prediction.

After all, it's okay to stick one's neck out and put a number on the table, but what if the global context changes in the meantime?

The reason why I referred to the cosmic energy theme in my opening sentence is because when I skimmed through various broker research reports this morning, I immediately noted Deutsche Bank had released an update on its market projections.

We all know why: those earlier projections have been pared back. But, and this is probably as important, not by as much as one would have thought.

Deutsche Bank remains firmly on the side of the market optimists, with both strategists arguing the market is taking a very bearish view on earnings growth next year, with share prices falling to levels implying very low growth for fiscal 2011.

This then leads to the inevitable conclusion that the recent falls in global share markets have opened up value-opportunities. Note the Deutsche Bank strategists do not dismiss the problems in Europe, nor the uncertainties in China, nor the slow recovery in the US, not even the fact that the Australian economy too appears to be slowing.

It's just that they are of the view that at some point all those factors have been priced in, and right now, that seems to be the case. Taking into account that all of the above mentioned factors will cause some downgrades to present earnings forecasts -in the order of 5% for FY11 and 5% for FY12- Deutsche Bank believes the ASX200 should be at 5586 by year end.

In other words, the second half of the year should see a gain of approximately 25%, dividend pay-outs not included.

If you think that is a bit rich given the present state of investor sentiment, then consider that the official target for the ASX200 has been set at 5750. In other words, Brennan and Baker don't believe earnings expectations will come down by as much as 5% for each of the next two fiscal years. (The official target, by the way, implies a gain of nearly 30%, final dividends not included). As per always, the devil is in the detail.

The Deutsche Bank projections for the Australian share market imply a normalisation of share markets and investor sentiment in the months ahead, so that the average Price-Earnings multiple (PE) for Australia's top 200 listed companies will be allowed to trend back to 14; the market's long term average.

Were we to take a slightly less bullish approach, and assume a PE ratio of 13 instead (still including 5% cuts to FY11 and FY12 forecasts), then the ASX200 is only projected to reach fair value at 5187 by year-end. Add the fact that Deutsche Bank's earnings estimates are a bit more bullish than what we have calculated as consensus estimates here at FNArena and we can easily slice off another 100 points or so.

Of course, we can play around with these numbers until the cows come home, but at the end of the day the market's value and direction will be determined by what happens with the world economy between now and next year.

While I'd be inclined to agree with all those experts that the Australian share market looks relatively cheap below 4500, I also have a few points to add:

- The current trend in global growth expectations is negative. Most experts might stoically stick to their earlier calculations and projections, but on an individual basis there is no discussion possible: growth expectations for Europe, for the UK, for China and for Australia are trending down. Not in a big way, as expectations for Europe and the UK were relatively low in the first place, but down nevertheless.

- The Big Question among all of this is whether expectations for the US economy can hold up. It is only fair to say this remains a Big Question at this stage and we will all have to find out whether this will prove to be the case. The US housing market, mortgage stress and unemployment, to name but three factors, appear wobbly enough to at least remain not too convinced about what is likely to follow next.

- China, India and other economies in Asia might be holding up well, the US and Europe remain the Big Guns on a global scale, especially if either or one of both were to slump into negative growth again. Europe is simply not looking good, the US is equally looking towards a slowing in momentum. At this point in time you'd either have to be a brave man or a fool if you dared to call exactly where both economies will be at in six months' time.

- Never underestimate the fact that an uptrend tends to cover up the negative, but that a negative trend exposes weaknesses and can bring out the worst. Nobody ever mentioned Dubai or Greece when economies were running hot, but from the moment the downturn kicked in the pressure kept building until both became the subject of global news headlines. The same principle applies to companies, just ask Downer EDI (DOW).

- While earnings expectations have been in decline since April, overall erosion for FY11 and FY12 estimates has remained benign thus far. This does not take away the fact that this trend too is now negative and that more of the same should be expected. Most vulnerable appear resources stocks. Prices for base metals and crude oil have now fallen below what most securities analysts have pencilled in for the year. This, logically, opens the door to further cuts in earnings forecasts. Luckily, most share prices are well below price targets, so there is a lot of room to wiggle for loyal shareholders.

- From a technical perspective many commodities and share markets simply look ugly, ugly, ugly. It's all fine for fundamental analysts to point at intrinsic valuations and the latest economic data, but both factors are in essence backward looking and subject to changes in the months ahead. Sometimes the market as a whole is smarter than each of us individually. I believe this is why, at critical junctures, technical indicators can sometimes point towards a change in trend that is not yet visible to most observers.

- Global equity markets are now trading below 200 day moving averages. Hardly a sign that all is well on the global economic and financial front. This becomes even more the case with commodities also having sunk below 200 day moving averages. In Australia, and despite two positive sessions in a row, the 50 day moving average is at the point of crossing below the 200 day moving average. This is, from both a trend and a momentum point of view, a negative development. There is simply no other way of putting this.

- On the matter of 50 and 200 day moving averages crossing over (the so-called Cross of Death): late last year, CSL ((CSL)) shares experienced the negative cross-over and this has kept the shares from rallying higher for a while, but ultimately CSL shares managed to recover and surge above both trend-lines, thus reversing the technical outlook. Taking a leaf from the CSL book, the least we should assume is that Australian shares are looking towards some tough times in the months ahead.

- What strategists at Deutsche Bank cannot predict (nobody can) is whether investors will still be prepared to value the Australian share market on average at 14 times earnings estimates for FY11 when earnings estimates are in decline (even by only 5%) and economic data remain shaky. My best guess is that, unless the overall landscape brightens up considerably, this will prove not to be the case. So even if today's optimists prove to be correct and present earnings estimates remain largely intact, lower than usual PE multiples will likely keep a lid on upside potential.

- There can be little doubt that certain stocks look like great value at current share prices. BHP Billiton ((BHP)), for example, is currently trading at some 8 times FY11 consensus EPS (USD estimates translated into today's AUD value). Even if we were to take a very bearish stance on global growth, this would still leave plenty of room for future earnings downgrades. However, value in itself is seldom enough to inspire share prices into closing the valuation gap. We need momentum too, and confidence, as well as a more positive technical picture.

By Rudi Filapek-Vandyck, Editor FNArena

While reading through daily research reports issued by major stockbrokerages in Australia it has become quite impossible to ignore the fact that earnings expectations are no longer in a clear uptrend in Australia.

I haven't kept a ledger, but my impression is that every report in five, on average, now contains lowered earnings estimates, while an equal equivalent contains higher estimates.

If we take a positive view, this means that downgrades and upgrades are still keeping each other in check, more or less, and that the majority of reports contains no changes, implying most forecasts for this year and next are on balance still looking okay.

Also, most cuts to forecasts in relationship to large caps are relatively minor. We're talking two percent here and three percent there. The best example of this have been the Australian banks. ANZ Bank ((ANZ)), Westpac ((WBC)) and National ((NAB)) all beat market expectations with their interim results, but all three saw earnings estimates drop by a few percentages for this year and next.

For some of the smaller cap stocks, however, earnings revisions have come hard and fast. For example, JP Morgan cut its forecasts for engineer Ausenco ((AAX)) this week by 21% and by 8% for this year and next, while analysts at Citi reduced their already downgraded forecasts for Sigma Pharmaceuticals ((SIP)) by another 10%.

The optimists among you will no doubt argue that none of the above seems enough to stop the local share market from resuming its uptrend once the situation has cleared up in Europe. After all, the market sell-off coming into May has been far, far worse than the loss in earnings growth expectations for the majority of Australian companies.

This is true. However, what has become clear is that equities in Australia have now lost one of their main drivers since March last year: continuous upgrades to forecasts. This automatically makes the upcoming results season in August a very important one.

In the meantime, we will all have to find out whether the pause in April will turn out just to be that, a pause, or whether it marked a reversal in the underlying trend. In case of a reversal, even only on a minor scale, I'd be inclined to think the Australian share market will not be able to cross the 5000 level this year. Or if it miraculously does, it won't be able to hold on.

I base this prediction on the fact that I am a firm believer in the principle that trends are an investor's best friend. If the trend turns down in earnings forecasts, the share market will not be able to sustain full-looking valuations. It is that simple.

It thus can only be of concern that economists have started to reduce their growth projections for China and for Europe. The latter won't be a surprise to anyone, I presume. The first probably requires a bit of explanation.

It probably won't have escaped anyone's attention that together with most equity markets worldwide, industrial commodity prices seem to have peaked in April too. Apart from a retreat in global risk appetite, certain developments in China have been responsible as well.

Chinese policymakers are fully intent in causing a hard landing for their domestic property market which is showing all signs of a liquidity driven bubble. Because they can. It won't bring down the economy overall, but it will teach speculators a lesson. Unfortunately, such a crash is likely to also impact on demand for building-related commodities.

It is this realisation in mid-April that has made investors increasingly gun shy when it comes to buying more exposure to copper, nickel and iron ore, for example. Especially since prices were already at elevated levels. Prices have pulled back since.

Again, this seems but a very good reason to not push share prices of producers of these commodities to the max. Share prices of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) may well look ridiculously cheap on current forecasts for fiscal 2011, but it is a telling sign that both have only bounced back from the recent carnage in a rather measured manner.

Technical analysts will add that recent carnage has pushed both share prices below the 200 day moving average – not a positive sign.

Observe also the Australian dollar has been unable to surge back above US$0.90 – another sign that global investors have become more cautious towards the China-commodities story. (The overall mood is not supported by newswire headlines swirling across the internet that the Chinese share market has this week "officially" retreated back in bear market territory).

Bottom line: none of the above proves that the underlying trend in earnings forecasts is about to turn into a barrier instead of providing support, but risks are on the increase and thus extra caution seems but warranted.

This particularly applies to Australia, where increased taxes for resources and higher interest rates form part of the outlook, while economic data seem to be softening.

Some unexpected surprises might come from fundamental changes taking place on currency markets, with the euro now destined for much, much lower levels against most other currencies; at least that's what it looks like in the aftermath of the PIIGs problems in Europe.

Investors might want to take note that if the euro is now in a multi-year downtrend, and certainly half the world seems to believe that is the case, than one of the victims on the Australian share market is likely to be bloodplasma and flu vaccine producer CSL ((CSL)).

So far, most of the FX attention in regards to CSL has been on how a strong AUD/USD is eroding the company's earnings for Australian shareholders, but analysts at Morgan Stanley reported this week CSL's bottom line is even more vulnerable to changes in values for the euro and the Swiss franc.

While this implies that current market expectations for this year (FY10) will have to be adjusted downwards to the tune of some $35m (roughly 3.5%), the real impact would be on FY11 numbers. Morgan Stanley suggests that, even on relatively healthy underlying growth figures, CSL's earnings per share in FY11 could potentially fall below this year's projected EPS figure.

If correct, this implies some 15% downside to current consensus expectations. Obviously. It would also imply that CSL shares will not be able to close the gap with broker target prices over the next twelve months. If anything, this likely means those targets will be pulled back.

Based on FNArena's consensus calculations, CSL shares are currently trading on Price-Earnings ratios of 17.4 and 16.2 for FY10 and FY11 respectively. Current consensus forecasts are for growth in earnings per share of 10.9% and 7.3% respectively. The average price target is $38.13, some 15% above where the share price is right now.

All those numbers now seem under threat because of a new trend for the euro. Another earnings headwind for the Australian share market?

By Rudi Filapek-Vandyck, Editor FNArena

Greece, Australia's tax proposal for super profits for miners and a general retreat in risk appetite are catching most headlines across the globe these days, and they are all mentioned as the reasons why equities and commodities have rolled over while rolling into May.

As per usual, I beg to differ, and I beg to differ profoundly. What is happening right now is the fallout that should be expected when everyone jumps on board of the same ship (over-leverage and over-exposure) while pushing up asset prices to lofty heights (pricey valuations), meaning there simply is no room for doubt or disappointments, or else.

High asset valuations, be it sugar, oil, nickel or otherwise, are best compared to stocks that trade on high Price-Earnings ratios. As long as high growth and positive surprises continue to feed upward momentum, there's plenty of upside to keep an ever growing base of groupies and fans happy and satisfied. But beware when the first bumps on the road start impacting on the speed moving forward.

Last week, I pointed out that upgrades to corporate earnings in Australia had unexpectedly come to an end in April. You wouldn't have read much about this elsewhere, but I'd like to again take the opportunity to emphasise the importance of this observation.

Ultimately, and despite all the media's attention for political issues, economic data and temporarily important matters such as funds flows, interest rates and new taxes and laws, what really matters for share markets is what kind of profits investors can expect from listed companies.

Some of Australia's prime export products -coal and iron ore- are enjoying near unprecedented favourably market conditions. The fact that underlying profit growth for the 200 largest companies on the Australian Stock Exchange ceased lifting higher in April is thus of major importance.

To put it simply: if April marks the reversal from upgrades to downgrades for corporate earnings forecasts this will not reflect well on the share market going forward. Remember that on this year's profit forecasts (FY10) the share market looks well overpriced trading on an average Price-Earnings ratio of circa 16.5 – well above the long term average of 14-14.5.

The only reason why such a high multiple is in place, and why it can be regarded as acceptable, is because of high expectations for fiscal 2011. In other words: investors were happy to hold on to their stocks even though these stocks look expensive on this year's profit estimates, but only because next year's jump in profits will reduce relative valuations for these stocks to a far more acceptable level.

What follows next is an open question about what price exactly investors should be willing to pay on the basis of earnings projections for 2011. Most of this is pretty much academic stuff, as most investors buy shares because they are moving up and most shares will move up as long as market expectations are on the rise.

Rising earnings projections feed into positive market momentum because it makes shares look cheaper, hence the improved buyers' appeal.

Falling earnings projections, however, do the exact opposite. The best example I can offer in this regard takes us back to 2007 when I warned everyone who cared to pay attention the underlying trend in earnings in Australia had turned negative because of an ever appreciating Australian dollar.

But share prices kept on rising and rising, until it all came to an end into the following year.

Maybe we should say thank you to George Papandreou, to Kevin Rudd and to Hu Jintao for preventing share market valuations once again from getting too far ahead of themselves?

It is important to note that all of the above has occurred against a background of continuously improving economic indicators. The forward looking index from IHS Global Insight (“2009) Forecaster Of The Year”), for example, is now indicating the US economy will continue growing at a pace of at least 3% throughout September, and possibly longer. Only a few months ago this same index suggested US GDP growth would hold up until May, possibly until June, but after that the outlook was looking rather bleak.

Improving -and ultimately solidifying- economic fundamentals are without any doubt a positive for companies and for share markets. They take away the idea that economies are getting ready to fall off a cliff again in the near future. Witness, for instance, how predictions about a double-dip for the US or for Europe have all but disappeared.

Coming out of the abyss of the post-Lehman brothers international credit freeze, this process of economic recovery has translated into continuous upgrades to corporate earnings forecasts. This, in return, has underpinned positive sentiment which helped share prices recover from their troughs in March last year.

At some point, however, further economic growth does no longer translate into even higher profits. The best example for this are the Australian banks, world class members by anyone's standard. Profit results so far this reporting season have mostly exceeded market expectations, but the impact on future estimates has been benign (at best). This while valuations for Australian banks prior to this week's sell-off seemed pretty full, on FY11 projections.

The key question regarding the Australian share market is now whether April will simply turn out a pause in an ongoing up-trend, or whether this really is “it”.

If this is as far as it goes for next year's profits in Australia, then this is in itself nothing to be sour about. Apart from resources companies, most Australian companies never saw their profits disappearing at the same rate as companies in the US and Europe did during the Global Financial Crisis.

Coming back with a (projected) profit improvement of some 6% on average this year, followed by 17% next year is something most CEOs (and investors) usually would instantly sign up for. But we are now facing two problems: trend and valuation.

At 4674, the Australian share market is currently trading at an estimated 14 times FY11 average earnings per share (EPS). A few weeks ago the index was closer to 5000 and the average multiple for Australia's top 200 stocks was also 14. That was courtesy of the fact that the average projected jump in earnings per share for FY11 stood above 19%. Today this number has fallen below 18%.

Investors should note these numbers are averages and do not take into account significant differences between companies. Certainly, the sell-off from 5000 to current levels has again created upside potential for most banks. In addition, resources stocks such as BHP Billiton (BHP), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) have seldom looked as attractive as they do today (on pure valuation metrics).

Every day now I see securities analysts slicing more off their future earnings projections. That is a worry.

This would turn into a major concern if it turns out the Australian share market is leading the rest of the world in this. It is my understanding earnings projections in Asia and the US are still rising, though the rate of revisions has slowed down sharply. This earnings season in the US, for example, has reportedly added an average 3% to projected earnings per share.

Probably no wonder then the Australian share market has underperformed most international peers in April. What we have to find out however, is whether earnings estimates will continue falling in Australia and whether this will soon spread to other markets too.

I have a feeling the answer might be affirmative on both accounts. If correct, this means further upside for share markets should be less than most experts are modelling.

By Rudi Filapek-Vandyck

Two important factors continue to act as a dampener on overall investor enthusiasm:

1.) Economic growth will slow down from its current liquidity and stimulus boosted levels, but when exactly and to what extent remains open for public debate
2.) The current rebound in economic strength will push more and more central bankers into tightening mode, but, again, when exactly and to what extent keeps market views highly divide.

According to the more positive market views, economic growth in major economies (China, US) will weaken in the second half of this year, but still remain at elevated levels. Consumers won't be participating at full force, but they won't have to as yet with business investments, re-stockings and expansions taking up the slack for the remainder of this year.

If inflation remains low, as many experts believe it will, then central bankers in key countries should be in no hurry to get aggressive (China) or to start tightening at all (US), which should allow risk assets to continue climbing the wall of worry throughout 2010 and into 2011.

Those with a less positive view doubt whether such a positive scenario can go on for so long without a substantial participation of consumers in large economies of the US and Europe.

Thus far, the pendulum has firmly swung in favour of the optimists. This has allowed commodities to rise to near 19 month highs, while equities indices across the globe equally are at or near 19 month highs.

Meanwhile in the US, corporate results on balance manage to beat already high market expectations, while economic data and indicators continue to push up growth forecasts for this year and next. And China hasn't raised interest rates and might not do so for a while yet.

Quite ironic really that amidst all these ongoing positives, both commodities and equities have run into stiff resistance towards the end of April due to investor concerns that prices might have run up too high too soon.

It is difficult to put a fair value on the price of crude oil or copper, but when it comes to the share market, earnings expectations serve as the ultimate guide for investors, especially since we left the "dash for trash" behind in late 2009. From here on the share market's ultimate fortune will be determined by the outlook for corporate profits.

Alas, the news on the corporate earnings front in Australia has become a lot less buoyant in April. Until early this month the positive impact from continuous upgrades to earnings forecasts served as a powerful stimulus behind ongoing share market gains. Over the past two weeks, however, this picture has somewhat changed with further increases rather benign and with analysts starting to cut some of their earlier forecasts.

As a result, projected growth forecasts as implied by consensus estimates haven't changed over the past four weeks. This would suggest that while upgrades to forecasts have continued outnumbering downgrades, the latter have nevertheless managed to negate any net gains overall.

Current consensus forecasts still anticipate Australian companies will improve their earnings for shareholders by between 5-6% in fiscal 2010, followed by a jump of close to 20% in fiscal 2011.

So who's responsible for the status quo in earnings expectations this month?

My first reflex would be to point the finger in the direction of defensive sectors such as telecommunication, consumer staples and health care. Smaller telcos such as iiNet ((IIN)) might still enjoy positive momentum from ongoing earnings upgrades, for the bigger players in the sector Telstra ((TLS)), SingTel ((SGT)) and Telecom New Zealand ((TEL)) the opposite holds true.

Telstra's short term fortunes might seem closely linked to the outcome of NBN-negotiations with the Australian government, in the background of today's headline stories and commentaries, securities analysts have been steadily downgrading their forecasts. On current estimates Telstra's growth will be negative this fiscal year, and barely positive in FY11.

The trend is not nearly as bad for SingTel, who owns Optus in Australia (and is reportedly looking for a demerger), but for Telecom NZ the trend is much, much worse. On current market expectations, Telecom NZ's earnings per share will continue to decline for at least the next two years. If these projections prove correct, the company's EPS will have halved between 2009 and 2011 (minus 50%).

Consumer staples stocks have similarly enjoyed reduced profit expectations this month, with question marks hanging over future margins and growth potential for both Woolworths ((WOW)) and Wesfarmers ((WES)). Earlier in the month similar questions had emerged for consumer discretionary stocks, as foreign competitors are now increasingly looking to enter the Australian market and with higher interest rates expected to put a lid on future consumer spending.

The biggest shifts, however, have occurred in the health care sector with companies such as Primary Healthcare ((PRY)) and Sigma Pharmaceuticals ((SIP)) recording large reductions in earnings forecasts.

In comparison with the earlier mentioned stocks in telecommunication and consumer staples, most healthcare stocks, including Primary, are still expected to grow EPS by significantly larger numbers in the years ahead. The problem is, however, most healthcare stocks tend to trade on high multiples. This is why the effect on share prices has been quite severe as both forecasts and multiples have contracted at the same time.

Probably the best illustration of this was this week's sell-off in CSL ((CSL)) shares. Prior to competitor Baxter's rather subdued assessment for the US market outlook for blood plasma, the shares were trading on a FY10 Price-Earnings ratio of 20. Post Baxter's industry outlook, the multiple has fallen to close to 17.

While this may not seem like much, shareholders have seen more than 10% being wiped off the value of their CSL shares in the process. To make matters worse, CSL is now expected to improve its EPS by 11% this year and by 7.6% only next year. Surely, the main question hanging over this stock for the months ahead is whether this outlook is correct and if so, does such an outlook deserve high multiples from the past?

I wish I could state, like market analysts elsewhere in Asia, that all these sectors have been holding back further progress in earnings support this month in Australia, but unfortunately, there have been many more culprits.

On top of the list sit many resources companies whose March quarter production reports either fell short of market expectations, or otherwise failed to inspire stockbroking analysts to further increase their estimates. Most large cap resources companies, however, simply disappointed this month, including Lihir ((LGL)), Newcrest ((NCM)), BHP Billiton ((BHP)), Rio Tinto ((RIO)), Santos ((STO)) and Woodside Petroleum ((WPL)).

Without exception, all production reports by these companies triggered cuts to forecasts this month. Luckily, for management and for shareholders, market expectations remain for higher commodity prices later this year and next, supporting much higher target prices, (mostly) positive ratings and ongoing expectations for further upside potential.

In addition, many industrial stocks have seen market expectations take a step back these past weeks, including Gunns ((GNS)), Graincorp ((GNC)), Hastie Group ((HST)) and the Australian banks. The latter are about to report interim results or update their shareholders otherwise on operational results in the coming weeks so it will be interesting to see whether this trend will be reversed.

If not, the Australian share market might find it difficult to move much higher beyond 5000 as the term "fairly valued" is increasingly appearing in stockbroker research reports, and increasingly as motivation behind recommendation downgrades.

Investors should note, on current FY11 consensus forecasts, the Australian share market could rise as high as 5200 before the market would become "fully valued" in a general sense. This broad assessment is based upon a multiple of 14.5 applied to present average FY11 consensus forecast for the ASX200. This does not take into account that recent price adjustments for bulk commodities have made the likes of BHP Billiton and Rio Tinto look ridiculously cheap on FY11 metrics.

By Rudi Filapek-Vandyck, Editor FNArena

I am a close follower of the currency markets, as are other market followers. Such as, for example, the team of technical commodities analysts at Barclays Capital. Their main focus may be what is happening on price charts for crude oil, copper or platinum, but FX crosses are never far away during their daily routine.

There's a good reason for this too given currency markets have been at the forefront of global developments through the 2007-2010 boom-bust-recovery process.

For those who haven't read my past stories, or simply failed to pay attention to the close connection between currencies and risk appetite over the past years, here's one simple rule to follow: US dollar down is good, US dollar up is not good.

Of course, at some stage this inverse correlation between the greenback and risk assets will break down, but it hasn't thus far and I don't think this is something to happen in the short term.\

The euro threatened to break below US$1.32 today, which explains why Asian share markets, including Australia, are weaker today. Is it only my memory, but it seems like yesterday when the euro came down from 1.50 to 1.40?

The reason why I mentioned Barclays technical analysts in this story is because of their update on the euro this morning. It does not make for bullish prospects for risk markets. Now that the euro has fallen below key support at 1.33, the team is talking about the European currency "looking into the abyss".

If the euro stays below 1.3310/1.3267, report the analysts, the next target will shift to 1.2930. However, that is not where they think the euro slide will come to an end. "Bigger picture, however, a move below the monthly clouds would be a first since October 2002, pointing to an eventual push towards the 2008 lows at the 1.2315 area."

Craig Ferguson, strategist at hedge fund Antipodean Capital, whom I know also follows currency markets very closely, used Australian financials this week to warn his clientele for a pending sell-off. This in particular caught my attention as I have developed my own gauge for investor optimism, as reported several times in the past, and my own market indicator specifically involves the Big Four banks in Australia.

In short: compare share prices for the Big Four with their average price targets and when both meet ask yourself the question: what are the chances that securities analysts will start lifting their targets anytime soon? If the answer is negative, the share market has run too far ahead of itself.

Earlier this month I pointed out share prices for CommBank ((CBA)) and Westpac ((WBC)) had come eerily close to their average targets. This week they moved beyond. ANZ Bank ((ANZ)) was not far behind. The only one missing in action was National ((NAB)) but we all know NAB is the present laggard in the sector.

So was the market going to wait until NAB had gone past the average target too? It's always difficult to time these things and my simple indicator has proved very effective throughout the years, but it doesn't generate an exact timer.

Bank shares are down two days in a row though and more should be expected, predicts the aforementioned Craig Ferguson. Using a combination of technical calculations and chart formations, Ferguson predicted on Thursday Australian bank shares are now looking at losing between 7 and 12% of their share price peaks achieved in April.

And that is the more positive scenario. It is possible bank shares will lose all gains made since February, predicts Antipodean.

There is no mentioning of a broader impact for the share market as a whole, but those who have been reading my stories about the bank stocks indicator throughout the years know I always make the wider connection. If Big Four banks indicate overall optimism has run too high, this is likely the case for BHP Billiton, Rio Tinto, Woodside Petroleum and others as well.

If Antipodean's prediction proves correct, expect the ASX200 to fall to support at 4800. At the very least.

By Rudi Filapek-Vandyck, Editor FNArena

I am a close follower of the currency markets, as are other market followers. Such as, for example, the team of technical commodities analysts at Barclays Capital. Their main focus may be what is happening on price charts for crude oil, copper or platinum, but FX crosses are never far away during their daily routine.

There's a good reason for this too given currency markets have been at the forefront of global developments through the 2007-2010 boom-bust-recovery process.

For those who haven't read my past stories, or simply failed to pay attention to the close connection between currencies and risk appetite over the past years, here's one simple rule to follow: US dollar down is good, US dollar up is not good.

Of course, at some stage this inverse correlation between the greenback and risk assets will break down, but it hasn't thus far and I don't think this is something to happen in the short term.\

The euro threatened to break below US$1.32 today, which explains why Asian share markets, including Australia, are weaker today. Is it only my memory, but it seems like yesterday when the euro came down from 1.50 to 1.40?

The reason why I mentioned Barclays technical analysts in this story is because of their update on the euro this morning. It does not make for bullish prospects for risk markets. Now that the euro has fallen below key support at 1.33, the team is talking about the European currency "looking into the abyss".

If the euro stays below 1.3310/1.3267, report the analysts, the next target will shift to 1.2930. However, that is not where they think the euro slide will come to an end. "Bigger picture, however, a move below the monthly clouds would be a first since October 2002, pointing to an eventual push towards the 2008 lows at the 1.2315 area."

Craig Ferguson, strategist at hedge fund Antipodean Capital, whom I know also follows currency markets very closely, used Australian financials this week to warn his clientele for a pending sell-off. This in particular caught my attention as I have developed my own gauge for investor optimism, as reported several times in the past, and my own market indicator specifically involves the Big Four banks in Australia.

In short: compare share prices for the Big Four with their average price targets and when both meet ask yourself the question: what are the chances that securities analysts will start lifting their targets anytime soon? If the answer is negative, the share market has run too far ahead of itself.

Earlier this month I pointed out share prices for CommBank ((CBA)) and Westpac ((WBC)) had come eerily close to their average targets. This week they moved beyond. ANZ Bank ((ANZ)) was not far behind. The only one missing in action was National ((NAB)) but we all know NAB is the present laggard in the sector.

So was the market going to wait until NAB had gone past the average target too? It's always difficult to time these things and my simple indicator has proved very effective throughout the years, but it doesn't generate an exact timer.

Bank shares are down two days in a row though and more should be expected, predicts the aforementioned Craig Ferguson. Using a combination of technical calculations and chart formations, Ferguson predicted on Thursday Australian bank shares are now looking at losing between 7 and 12% of their share price peaks achieved in April.

And that is the more positive scenario. It is possible bank shares will lose all gains made since February, predicts Antipodean.

There is no mentioning of a broader impact for the share market as a whole, but those who have been reading my stories about the bank stocks indicator throughout the years know I always make the wider connection. If Big Four banks indicate overall optimism has run too high, this is likely the case for BHP Billiton, Rio Tinto, Woodside Petroleum and others as well.

If Antipodean's prediction proves correct, expect the ASX200 to fall to support at 4800. At the very least.

By Rudi Filapek-Vandyck

Yesterday's data releases from China have turned out a net positive for global equities and commodities, despite continued comments from economists worldwide that China should be looking at getting tougher on runaway growth in the short term.

Despite my earlier prediction this week that another batch of stronger than expected data would surely push Chinese authorities into swift action, it is now far more likely that the chances of this happening have actually reduced.

Don't expect to see a sizeable revaluation of the Chinese currency either, even though some economists are suggesting that, in light of this week's strong growth data, this looks like an opportune time for China to finally respond to outside calls for a currency revaluation.

As I pointed out yesterday, the Q1 GDP numbers look stronger on annual comparison (which everybody outside China looks at) but they are equally contrary to what is happening on a quarterly trend basis. See "Rudi's View: Yuan Revaluation Over-Hyped".

Indeed, given Chinese fears of possibly moving too hard too fast, and with memories of ill-executed policy action in 2008 still fresh, it may well be that Beijing prefers to look at the growth trend in quarterly terms (which is slowing) while drawing confidence from the fact that inflation is still benign (though expected to rise later this year).

If these considerations translate into Chinese authorities keeping their powder dry for the time being, and only targeting excessive property speculation through tighter administrative measures, it may well turn that this week's data releases mark the sweet spot for industrial resources, and probably for commodities in general.

After all, if the Chinese don't tighten and don't revalue, this leaves financial markets with above normal growth and no imminent signs of policy barriers in sight. Note that restocking is now happening in developed economies and there are no signs that central bankers or authorities in those regions will go anywhere near policy brakes for the foreseeable future.

As such, this week's Chinese data have brought about the next wave in increased growth expectations with economists worldwide upping their numbers for this year and next on the back of the stronger than expected outcome in this year's March quarter.

A few examples: Citi economists are now forecasting 10.5% GDP growth this year and 9.3% next year. At JP Morgan, economists have even gone one leap further: they are forecasting 10.8% GDP growth for 2010, up from 10% previously.

And Chinese authorities may well have given the clearest indication about their short term intentions this very morning when they announced extra measures to reign in property speculation. Under the new rules, second-home down payments will increase to 50% from 40% previously, second-home mortgage loan rates must be at least 110% of the benchmark rate and down payments for first homes larger than 90 square metres must now be at least 30%.

In addition, the Chinese government has reiterated its target to build 3 million units of economically affordable housing units and to provide 2.8 million units to people living in temporary shelters.

Note these new requirements come on the back of accelerating property prices, with price increases recorded of 11.7% (y/y) in March, after gaining 10.7% in February. Underneath these general data sits a rather alarming rise in residential prices for new houses of no less than 15.9% (y/y).

Of course, China can elect to hold off on further tightening in the short term, at its own discretion, but it won't be able to leave interest rates unchanged forever. There seems to be a consensus among economists that two or three interest rate hikes of 27 basis points each should follow in the course of 2010 (with many anticipating additional actions on top such as higher reserve requirements for banks).

Postponing the first rate hike beyond this month, or even this quarter, is only pushing out the inevitable.

This could well translate into a different second half for commodities and demand then we have experienced in the first four months this year. Economists at Westpac, who are forecasting Chinese GDP growth of 10.9% this year, reminded investors about the potential consequences of all of the above in an update this morning.

After 11.9% GDP growth in Q1, growth may well print 11% in the second quarter, suggest Westpac economists. Assuming their 10.9% forecast proves accurate, this implies GDP figures have to come down to sub-10% by year end.

Note that Westpac is at the top of market forecasts. The projected slow down in GDP numbers is larger in case of lower expectations for the year as a whole.

Regardless, Westpac is anticipating "materially" slower growth in the second half. The positive side-effect of such an outcome is that Chinese inflation should never really become a real problem this year.

As far as the widely speculated (hoped-for?) currency revaluation is concerned, it may simply never occur. Following on from similar suggestions made elsewhere, Westpac economists suggest China is unlikely to opt for a step-revaluation of its currency, because that would be too much of a shock-approach.

Instead, suggest the economists, it is more likely the authorities will allow for a gradual widening of the trading band for the renminbi against the US dollar. Given the hyped-up possibility of a potential CNY-revaluation, such a move might well descend as an initial disappointment upon commodity markets.

In summary, the odds seem in favour that Chinese authorities might stick to their gentle-gentle approach for the time being. This would translate into a reactive rather than a pro-active stance on monetary tightening.

As such, it may well be that, unless inflation data actually start showing a rise in underlying trend, Chinese interest rates are going nowhere for the time being.

However, that won't stop authorities from tightening further through quantitative measurements. Expect more regulation changes similar to the ones announced this morning and further hikes to bank reserve requirements, alongside stricter controls on bank loans.

In the meantime, Beijing will be working on a sharp reduction in overall credit and liquidity. This, and not so much higher interest rates, might turn out the real disappointment for commodities demand further down the track.

But not now.