Australia | Jun 28 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market pulled back after a big move yesterday due to lack of global sentiment. Aussie market was down 0.35% with turnover was just below $7.0b. Market has already priced in all the negative macro news while brokers have downgraded for all the macro and stock level risks. Analyst have become so gun shy, the risk is low to standout and be a contrarian. We feel that the market will start its positive run into the new financial year starting on Monday and find that result season will not be the “Valley of death” as expected by most market pundits. Central banks around the world are expected to keep rates low for longer than the next 12mths and that will drive further investment into equities in the new financials year. We have changed the “Overweight Banks and Underweight Resources” call from Jan 2014 to Market weight by trimming Big Banks (i.e. Big Four) and adding Big Miners (i.e. BHP/RIO). We expect to see improving data from China and stable recovery from US.
Top 15 reasons why it’s time to get back in the market for the new financial year run (from Friday 27th morning):
Markets are now mainly over Iraq and any related issues will be very short term similar to Ukraine and Syria
US data remains positive despite Q1 slowdown while Euro issues will force ECB to come up with further stimulus plans
China data has turned the corner and we expect Tuesday’s PMI data to further add to the positive view
Iron Ore is back above $95 and we suggest adding back the big miners (i.e. BHP, RIO) to market weight
RBA is not expected to raise rates till 2015Q3 at the earliest while house prices are beginning to flatten
Rebalancing from overweight Yield thematic (i.e. Banks) and underweight Resources (i.e. Big Miners) to market weight
Institutional Investors are away on School Holidays and Retail Investors historically push markets higher
Market to benefit from re-investment of substantial dividends from ANZ, NAB, MQG and WBC being paid in early July
Currency expected to trend down while market valuation will improve with better than negative outlook
Tax loss selling driving market volatility to historical low levels with investors sitting on the sidelines with cash positions
Brokers have downgraded commodity prices and pushed up currency outlook to levels we have had since start of 2014
Expect brokers to start upgrading in early July (i.e. before the reporting season) to match positive macro outlook
Government budget negotiation will water down the negative impact and currently priced into the market
Corporates are increasingly moving on M&A for industry consolidation while cashed up Private Equity is on the prowl
Monday is the last day of the month, quarter and the financial year…I’d be surprised if that is not a positive day
FIFA WORLD CUP WINNER: Due to the temperature and humidity, history shows that when it’s played in Europe it favours European countries while anywhere outside it favours South American countries. Since it’s a multi-layer group knock out competition and not a straight out horse race, any factor based ranking very rarely works. Brazil, Germany, Argentina and Dutch should make it to the last 4. Despite the great game against Spain, Dutch have a history of delivering bad games in knock out stage while the Spanish are slow starters in most competition. Australia has had a great tournament and will learn from it. As the competition sieves down to the big games, the main teams are getting through without playing their best yet. My pick
still remains with Brazil to beat Argentina in a South American Classico Final.
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