Australia | Sep 13 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market started negative and then traded up and down with lack of any strong sentiment.
We continue to be negative in the short term as the markets had run a head of valuation, rising geopolitical risks, China tightening, stocks going ex div, escrow shares taking marginal buying and ECB delivering nothing new for now. The market is currently waiting for clarity from US Fed on their interest rate outlook. We are also heading toward school holiday break at the end of next week and the market will be handed over to the retail investors.
Iron Ore keeps trending down and we expect it to hit US$80 before recovering to US$90 over time. BHP and RIO are now buy ideas when you look at the supply/demand and volume/margin dynamics. Given the drop in energy prices and the valuation of the energy stocks, STO and WPL are likely to see selling pressure to fund BHP and RIO. Myer (MYR) got smacked again…I still struggle to see a business model that can withstand the competition and macro head winds…another retailer with similar problems that we have had a sell call from $17 to now trading below $10 is Reject Shop (TRS). Next week brings clarity on Scotland vote, FOMC view on interest rates and Institutional Investors go on school holidays. Politicians have now raised the terror threat level from medium to high just before the biggest weekend of football finals. I am not sure what this was meant to achieve…on a weighted basis…everyone by now knows the threat was high and I think there are more negatives than positives when these big media statements are made. Statements with no details are perfect for media commentators to talk over for days, but does nothing more than scare the average citizen when they do not know when, what, how and some sort of end point.
Trading idea of the day: BlueScope Steel (BSL) – BSL is a flat steel producer and supplier of steel products and solutions focused on the global building and construction markets. It operates in four main geographical regions being Australia, New Zealand, Asia and North America. We see the stock re-rating to $6.30 with falling Iron Ore price and depreciating currency after years of structural changes and cost out programs. Given the improved balance sheet and operational efficiency of BSL compared to the margin pressure on small cap Iron Ore miners, BSL is currently placed well in any consolidation in the sector.
Market Move: Aussie market was down 0.27% with turn over was just below $4.3bn.
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