Australia | Nov 05 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market held a relatively flat day despite negative global sentiment and weak commodity prices. After yesterday’s retail data it was predictable for brokers to push the Christmas retail bounce story (i.e. like every year) and once again the macro headwinds suggest they will be wrong again. Predicting retail recovery in an environment of falling real wages, rising unemployment and rising cost of living is fraught with danger. If you want consumer cyclical exposure, look at stocks with global exposure like PMV, KMD, BRG, RFG, DMP, AGI, ALL, IPP, SEK, CRZ, FLT and REA.
We see a very likely scenario where RBA will be forced to cut rates in the middle of 2015 to stimulate a stagnant economy. The current policy mix and global macro environment points to Australia having relatively low growth rates for a number of years…till the next emerging market rebuild driven commodity cycle returns. Australia continues to re-invest in the old sectors while under investing in the new sectors. As the saying goes…If you pay peanuts, you get monkeys. Given the low global growth, we continue to favour the yield thematic. We also expect the global investors to chase our yield and keep our currency above its fair value.
There are a number of big data points out of US this week and they will set the tone for the near term market direction. US politics just got a lot slower with Republicans taking control of the senate…if you thought things were messy now, it’s going to get a whole lot funnier from now on. Anyone taking bets on another government shutdown in 2015!!!
Market Movers: CSR had a good day after a solid result on the back of housing strength….not sure that is going to last too long. WOW had a bounce as expected after recent bashing…expect investors to switch from WES. Number of defensive yield stocks had a good day as market was sceptical on the next move in US markets. Resources stocks saw some pain today and there is no need to pick the bottom with no macro positive on the horizon. Spot gold will continue to fall if the US data remains positive this week….again…no need to pick the bottom.
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 price s, 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 0.04% with turn over was just above $4.9bn. S&P/ASX200 closed at 5517.9, down 2 points.
Macro Events: Tonight – US ADP employment; China composite PMI, services PMI. Tomorrow – Australia employment and unemployment data; US ISM services.
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