Australia | Oct 13 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market remained negative with global sentiment despite better Iron Ore and China trade data. We went negative early Sep on valuation and geopolitical risks, but it seems we went positive too early in late Sep by underestimating the speed of the currency de-rating and collateral damage from US market pullback on overall growth worries. Usually these issues are spread and do not trigger substantial pullback. But the lack of any pullback in the US for over a year and the combined negative sentiment on multiple fronts has driven global markets down.
Our market had a substantial pullback since start of Sep (i.e. over 7.5%) with currency sliding (i.e. over 6.5%)…compared to US Indices like S&P 500 and DOWJON down less than 5% in the same period. We are currently trading below the long term fair value multiple while the yield support is better than any other market in the world. Given the yield, valuation and the currency pullback, we continue to feel confident that our market will recover despite the short term global volatility. We continue to expect AUDUSD to remain in the high 80’s in the short term and then gradually come down to mid 80’s.
We continue to feel that RBA is currently trying to curb house prices so as to cut rates in mid-2015 to stimulate a stagnant domestic economy. We remain negative on the domestic economy and expect local / global interest rates to remain low. We also expect global investors to return to our market with currency stabilising in the short term. We continue to see risk to commodity prices and expect the new equilibrium levels to put pressure on the margins of the high cost producers and the mining services sector. The continued global growth worries will move the flow of funds to the Australian equities with falling bond yield outlook. Oil prices remain very low levels despite fundamental reasons pointing to higher prices. Big cap energy equities have now pulled back and starting to offer good value at current levels.
Trading idea of the day: CarSales.com (CRZ) – CRZ is a global online car classified business model now moving into related financial services. It is now trading below $10 and we see the stock re-rating to $12.50 in the near term as the market’s search for growth in global growth downgrades. The free cashflow generation of this model allows CRZ to keep acquiring and growing globally.
Market Move: Aussie market was down 0.63% with turnover was just above $4.7bn. S&P/ASX 200 closed at 5155.5, down 32.80pts.
Macro Events: Tonight – IMF meetings; Japan, US, Canada holiday. Tomorrow – Australia NAB business survey, Reserve Bank of Australia assistant governor Guy Debelle speech 9.30am Citi’s 6th annual Aust and NZ investment conference.; Europe industrial production.
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