Australia | Nov 03 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market took a breather with weak China and housing data despite positive global lead. US growth remains the beacon for investor stability while Euro remains the mess. BOJ delivered a surprise stimulus kicker for global markets and tried to keep Japan on the recovery path. We continue to expect the currency wars to keep rates low for longer. We remain of the view that while rates remain low, Australian equity dividend yield is hard to ignore when comparing on a global risk/return basis.
House prices keep running higher with investors pushing it up…Westpac confirmed the risk with their outlook. The only real solution is for the government to limit negative gearing on newly built dwellings from a certain date and take the heat out of existing dwellings. This will deliver better option for first home buyers with existing dwellings while investors investing on new properties will have to take the risk about supply and demand. APRA can then move to increase the protection for the banks on the negative geared new properties. This protects the economy from systematic risk while allowing the property sector to grow within macro dynamic limits. Housing bubble risk is real and growing… we need to act or pay the price later. SMSF are holding nearly $9b in geared property investments (up 300% in 2 years) while governments remain inactive due to vested interests.
Domestic economy is stuck in low growth while policy offering from all sides of politics is as bad as the Australian cricket team’s batting card. RBA will be forced to show leadership by reducing systematic risk to banks and de livering stimulus through currency war (i.e. rate cut).
Market Movers: LNG has bounced over 30% in the past 2-3 weeks on better results. HGG continues its recovery after solid result last week…path back to $5. HGG has been a substantial underperformer in the asset manager space while any ECB move on QE will put a rocket under the share price. The negative performers were dominated by Gold and Iron Ore stocks…neither of those sectors look positive as the commodities are still on the slide looking for a lower equilibrium.
VET took another hammering after former founder went on media calling for management change after the debacles…expect other major shareholders to push for change as well…too many big fund managers still holding substantial while Future Fund has also now joined the ranks…stock to recover above $1.
Currency: We continue to expect AUDUSD to move from 87 to 89 cents in the short term as global investors come back into Aussie markets (i.e. reverse part of the September currency trade) and then gradually come down to 85 cent level as the domestic economy deteriorates.
Interest Rate: We continue to feel that RBA is currently trying to curb asset prices (i.e. house prices, equity markets etc.) with inflation under control, so that they can cut rates in mid-2015 to stimulate a stagnant domestic economy. More brokers are pushing back rate rise in Australia well into 2015, but we see no rate rises till 2016. It is not hard to realise that the tidal wave of unemployment, rising cost of living and falling living standards are going to make consumers save more and spend less.
Trading idea of the day:
CarSales.com (CRZ) – CRZ is a global online car classified business model now moving into related financial services. It was 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. Positive momentum since the AGM is being maintained with share price bouncing from below $9.50 to close $10.70 today.
Market Move: Aussie market was down 0.36% with turnover was just above $4.1bn. S&P/ASX200 closed at 5506.9, down 19 points.
Macro Events: Tonight – US ISM manufacturing. Tomorrow – International trade, retail trade, Reserve Bank of Australia board meeting; US trade balance, factory orders.
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