Australia | Jun 06 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market jumped up on the global lead with ECB’s move to stimulate growth. Despite Iron Ore prices holding and brokers calling the bottom, market is still not jumping into the miners with currency moving up. Now we wait for US employment data coming out tonight. Positive employment data in the US should set a very positive tone for next week, but we have an extra day off to see the global markets go again on Monday. Even if it is negative, markets may just blame the weather and move past it. You never know how it will turn out in this Central Bank made market conditions. Aussie market closed up 0.50% while turnover was just below $4.7b.
Consumer Confidence: Tidal waves of unemployment coming in the next few years, rising cost of living pressures and budget worries have slammed consumer confidence down to multi year low. We continue to be negative on local cyclicals with slowing economy. Continued bickering, party politics, lack of long term planning and real policy reform will keep sentiment low. We expect the unions, pensioners and students to continue to keep the media fuelled for months to come.
Poperty Prices: We continue to expect areas where substantial unemployment and middle to low income earners live (i.e. Canberra) to see property price decline in the next 1-2 year time frame while middle to higher income areas should trade sideways with affordability falling and rates remaining unchanged. The top end should continue to rise with overseas investors from Europe and Asia continuing to look at Australia as a safer location to park wealth.
Tax Loss Selling: Be aware that we are headed for tax loss selling period where substantial underperformers/outperformers are likely to see selling pressure and open up buying opportunities.
Currency Outlook: We maintain our view that AUDUSD will settle around 94 cents (i.e. remain in 87-94 cents band) in the short term and then track down to mid 80s. We need to see substantial US or China growth risk for currency to break the recent trading pattern…now 93.3 cents.
Interest Rate Outlook: We maintain our view that our rates will remain unchanged at the current low level atleast till 2015Q2. We have to see substantial collapse of consumer sentiment from current low levels to force RBA to change lower. RBA can’t afford to support any more asset bubble inflation with lower rates despite global Central Banks keeping rates at historical low levels.
Macro Events: Tonight – Germany industrial production, trade balance; UK trade balance; US non-farm payrolls, unemployment rate, average hourly earnings, consumer credit; Canada unemployment rate.
LONG TERM MARKET CALL => Bull market to 6500 in 2 years on 16th May 2013
SHORT TERM MARKET CALL => Buy call on 22nd May 2014
PREFERRED THEMATIC => Yield (i.e. Banks, TLS etc.) thematic over Resources and Domestic Cyclicals since 21st Jan 2014
WHAT WE LIKE => QUALITY, YIELD, EARNINGS CERTAINTY, MOMENTUM, CONSTRUCTION, FOOD, ONLINE, MEDIA, TELCO
WHERE WE SEE RISK => INSURANCE, DISCRETIONARY RETAIL, MINING SERVICES, LOCAL CONSUMER CYCLICALS
POINTS OF INTEREST IN S&P 300 STOCKS BY SECTOR:
• Energy stocks were positive. We maintain our preference to the bigger players such as STO and WPL with OSH improving with recent upgrade. Big moves> UP: PDN (+4%), SEH (+3%)
• Material (Ex Mining) stocks were positive. We maintain our preference to packaging stocks such as AMC and ORA while NUF beginning to look good on the long term food thematic and ABC on the housing cycle. Big moves> None
• Mining (Ex Gold) stocks were mainly negative despite stable Iron Ore. We maintain our preference in the big miners BHP (+0.11%) and RIO (-0.42%) while ILU is coming back into the picture with recent updates and management outlook. Big moves> UP: IRN (+9%); DOWN: SDL (-13%) > infrastructure plan update, LYC (-6%), BRL (-4%)
• Gold stocks were positive with ECB changes. We continue to like low cost producers like NCM, BDR and SAR when gold price settles closer to $1220. If the US employment data tonight is good, then we may get that leg down to $1220 level. Big moves> UP: SBM (+16%), EVN (+7%) > CFO appointment, KCN (+6%), TRY (+5%), BDR (+5%) > change in substantial holding, RSG (+4%), NST (+4%), MML (+4%), PRU (+3%)
• Industrial stocks were mainly positive. We maintain our preference in CCP and SEK. We continue to see high risk in mining service companies due to commodity price volatility and resource sector capex decline from 2015. Big moves> UP: BLY (+10%), MRM (+5%) > one of our GARY picks, HIL (+4%), DCG (+3%), TSE (+3%); DOWN: ANG (-10%), MAH (-5%)
• Consumer stocks were mainly positive. We maintain our preference in ALL, FLT, AGI, SWM, SXL, PRT and TGA while remain a fan of other media stocks like TEN below 27 cents despite the problems and APN on M&A. We see big risk to discretionary retail stocks like DJS, HVN, JBH, MYR, NCK and TRS in falling consumer sentiment. FLT looks good value long term for global tourism exposure with recent pullback below $47. Big moves> UP: VRL (+3%)
• Staple stocks were mainly flat. We maintain our preference in WES and WOW. Big moves> None
• Healthcare stocks were slightly positive. We maintain our preference in ANN, RMD and our pet favourite GXL. Big moves> UP: PBT (+11%), BNO (+5%); DOWN: ACR (-3%) > Moved out of S&P 200
• Banks stocks were positive and moved the index up. We maintain our preference in ANZ and NAB as they offer best global exposure out of the big four. Big moves> None
• Diversified Financial stocks were mainly positive. We maintain our preference in MQG for the global exposure while HGG and BTT are worth a look on any pullback. Big moves> UP: FXL (+5%), OFX (+4%)
• REIT stocks were mainly positive. We maintain our preference in SGP and LLC to get housing and construction exposure while MGR, ALZ and DVN look interesting with housing exposure. Big moves> UP: AOG (+4%)
• IT stocks were slightly positive. We maintain our preference in CPU while remain big fan of CRZ and IPP in the long term. Big moves> None
• Telco stocks were slightly negative. We maintain our preference in TLS while remain big fan of TEL and IIN in the long term. Big moves> UP: VOC (+3%); DOWN: AMM (-7%) > placement to raise $40m, NWT (-5%)
• Utility stocks were mainly negative. Big moves> None
• Overall positive day on good volume. Now we need US employment to deliver to push the markets to the next level.
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