Australia | Jun 12 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market pulled back with global lead while any recovery with local employment data was short lived. Market lacking any impetus to go higher while low interest rates keeps equities in the game. It was a broad slide with every sector taking some pain today. Aussie market closed down 0.46% while turnover was just below $4.2b. I am not holding my breath for a high turnover market move on Friday.
Macro Events: Tonight – US retail sales.
Macro Events: Tomorrow – Australia lending finance; US consumer sentiment, producer prices; China monthly data.
M&A Cycle: Businesses with strong cashflow and solid balance sheet in a falling consumer sentiment and low interest rate environment prefer to chase growth through cost cutting, share buy backs and M&A. Cost cutting cycle is coming to an end with further improvements requiring wage reduction or M&A. Wage cuts will take time to work through structurally and also will have political implications for the government. Government wants to avoid any wage battles with unions till the budget gets passed. This leaves corporates either buying back shares or consolidating industries to drive better earnings per share growth.
We expect sectors under extreme cyclical low pressures (i.e. discretionary retail, mining services and small cap resources) and regulatory change candidates (i.e. telco sector and media sector) to experience M&A in the next 12mths. The worry for investors is that a stock that has had everything go wrong could suddenly become M&A target and bounce 30-40% in a day. Best bet is to
sell the structural problem stocks and keep the cyclical problem stocks. Private equity is sitting on the side lines with substantial war chest built up by floating number of stocks over the past 6-12mths. Watch the media sector for M&A with TEN, SXL, PRT and APN likely prey.
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. Recent Job Ads and Employment data further strengthens our argument that unemployment is going to get worse in the next 12-18mths. 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.
Property 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. Recent housing finance data is beginning to show signs of affordability and consumer confidence taking effect. In a longer term thematic, we expect future generations to prefer renting than buying property with rising cost of education, housing and lower wages to make housing affordability harder without substantial assistance from their parents.
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. But be careful to not sell cyclical low stocks as they may become M&A targets very quickly as private equity is cashed up after number of floats.
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 93.9 cents.
Interest Rate Outlook: We maintain our view that our rates will remain unchanged at the current low level at least 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.
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