Australia | Aug 05 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market remained negative with mixed global trend. China Services PMI below expectation and RBA’s lack of jawboning did not change the mood. Valuation, growth and yield aspect of Resources, Financials and Industrials are showing that we are paying historical high cost for growth and yield with risk factors piling up in both global and local basis. Optimism drove the market to historical high while the risks piling on the market finally broke the camel’s back on Friday. Since most of the big caps have already flagged their result, we do not see substantial upgrades to support the next move and hence expect a pullback around 5% from the high to bring back the investors.
We continue to feel that corporate earnings will be close to expectations (i.e. no “Valley of Death”) while low interest rates are likely to drive M&A cycle sooner than later. Investors have been sitting on the sidelines since May waiting for a correction. We remain positive in the long term, but markets do not go up in straight lines. We don’t see this as a substantial correction, but a speed bump on the road to recovery. Spot gold has bounced back over $1290 and we see a risk trade coming with gold equities.
Top 10 reasons to take profit from Monday (4th Aug) morning…
1 – Sentiment shot after US market drops 300 points, geo political issues continue, new federal budget cuts and financial sector inquiry woes
2 – Positive news from US and China already priced into the market with interest rate rise potential getting media play
3 – Market valuations stretched while earnings revision not showing green shoots of recovery yet…big caps have already flagged their earnings
4 – Volatility measures on the rise with negative sentiment and stretched valuation
5 – House prices are beginning to run out of steam while construction cycle starting to hit top gear
6 – Easy gains from jump in volatility after tax-loss selling is just about done while gold is beginning to show its defensive nature
7 – Investors waiting for correction are starving the market of the marginal buyer in low volume trading environment
8 – Regulatory risk with more budget cuts and financial sector inquiry to keep pressure on consumer and financial sectors
9 – Global risk with Gaza and Ebola have the potential to deliver substantial loss of life not seen since Iraq war
10 – We remain positive long term with short term risks piling up…market does not go up in straight line…time to manage risk
Trading idea of the day: Xero Limited (XRO)…we turned positive after it was sold down below $22 with investors turning on the stock after driving it as high as $42. XRO is a NZ cloud based accounting software company that every accountant seems to love…even buying shares at $40. We see XRO value emerging as they continue to increase customer base globally with potential US listing to help the profile. It is an early stage online growth story with substantial risk, but the potential upside will drive this stock back closer to $30 in the next 12mth as market chases growth.
Market Move: Aussie market was down 0.40% with turnover was just above $5.0b.
Macro Events: Tonight – Euro zone services PMI composite PMI retail sales; UK PMI services; US Markit services PMI, composite PMI. Tomorrow – New Zealand private wages, unemployment rate, employment change; Germany factory orders; US ISM non-manufacturing composite, factory orders, economic optimism, MBA mortgage applications, trade balance.
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