Australia | Sep 11 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market started positive with US lead and then dived down as sentiment changed with falling Iron Ore and US plans for Iraq. We continue to be negative in the short term as the markets had run ahead of valuation, rising geopolitical risks, China tightening, stocks going ex div, escrow shares taking marginal buying and ECB delivering nothing new for now. We are off to Iraq for another go at solving a puzzle we can’t understand. Everyone is for the humanitarian efforts, but history shows when US trains and arms any group in the Middle East…in a few years they end up being the bad guys. Let’s hope this does not happen again. Unemployment data was all over the place…it popped back to 6.1% est 6.3%…but everyone now expects things to get a lot worse before improving…we see it going above 6.5%. Iron Ore keeps falling and we expect it to hit $80 before recovering to $90 over time. BHP/RIO are now buy ideas when you look at the supply/demand and volume/margin dynamics.
Myer reported another Bernie result…more recovery stories than in Marvel Comics…management blamed everyone…few people wondering why there was no profit warning. Discretionary retail remains tough with consumer sentiment lagging at very low levels. Myer needs M&A or dramatic change in the service model without cost blowout…brokers will get fancy to get a buy call on this one.
Trading idea of the day: Breville (BRG) – Breville engages in the development, marketing and distribution of small electrical kitchen appliances to the consumer products industry, with the main brand called Breville. BRG has a product development centre in Sydney, as well as a quality assurance centre in Hong Kong. Its products are sold to a number of markets, with principal markets being Australia, North America, New Zealand, and Hong Kong. We turned positive after it was sold down to $7.10 after the result and announcement of management change. PMV has increased their holding from below 25% to over 27% on the recent sell off. We expect BRG to trade back to $8.60 in the next 12mth as the market chases global growth stocks with exposure to falling currency. We added BRG to the Quant Strategy Portfolio last month after the pullback.
Market Move: Aussie market was down 0.51% with turnover was just below $4.5b.
Macro Events: Tonight – US housing starts. Tomorrow – Australia lending finance, Karoon Gas FY results, Warehouse Group FY results; China industrial production, retail sales; Eurozone industrial production, employment data; Japan industrial production; New Zealand business PMI; US retail sales, UoM consumer confidence.
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