Australia | Oct 14 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market bounced back up against the global trend with Iron Ore recovery, China reducing bank borrowing costs, currency recovering and banking sector downplaying loan restrictions. 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. We were trading below the long term fair value multiple while the substantially good yield support was expected to get global interest with currency stabilising.
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. RBA tried in vain to talk down the currency and the market today….rate cut anyone!!! We remain negative on the domestic economy and expect local / global interest rates to remain low atleast till 2015Q3. 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. OPEC maintaining supply and lower growth outlook keeps Oil prices at very low levels despite geopolitical risks…may be to make Shale look expensive…either way the energy stocks are under pressure.
Federal Government had a few beauties to keep us amused…(1) PM wants to shirt-front Putin…an ex KGB Judo master…Opposition was planning to not invite him to the party at all…yes, we are scrapping at the bottom of the barrel in political class and charisma (2) Treasurer continues to deliver great media content around the world on topics like climate change, pollution, growth…can we have more 3 word slogans please (3) New job/innovation plan delivered today…cherry pick 5 specific sectors where 2 are already in decline, 2 will take atleast 4-5 years to deliver any result and that leaves food/agri as the only hope….total budget $400m with 50% in stock option plans for 5 hand-picked sectors…that leaves less than $40m per sector for the whole of Australia….don’t hold your breath.
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 up 1.01% with turnover was just above $5.7bn. S&P/ASX 200 closed at 5207.4, up 51.90 points.
Macro Events: Tonight – Europe industrial production. Tomorrow – Australia building activity, consumer confidence, new vehicle sales; US retail sales, producer prices; China CPI, PPI; German CPI: ECB Mario Draghi speaks 5pm; UK unemployment.
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