IG Markets - Australian Market Wrap August 17 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets were mixed in Tuesday trade, with the Nikkei under pressure as investors continued to worry the countries anemic growth rate. A weaker-than-expected manufacturing report from the US did little to inspire confidence. The Nikkei 225 and Hang Seng are down 0.4% and 0.2% while the Kospi is 0.7% firmer.

Locally, the ASX 200 rose 0.9% to close the session at 4477, well off morning lows of 4423. Subdued overnight leads saw the domestic market open flat to slightly lower before buying emerged around 11am, with the industrial, consumer discretionary and financial sectors adding the bulk of the points. We also saw outperformance from mid-cap resource and growth stocks, which we view as a bullish sign for the overall market.

It feels like the market is treading water before this weekend’s Federal election. Come Monday, whoever wins, a degree of an uncertainty will have been removed from markets, which may be enough for fresh capital to be invested. Either way, less uncertainty is always a good thing in the eye of the market.

Despite the poor economic numbers overnight, it was encouraging to see the major US indices recover most of their losses. Sentiment isn’t good at the moment yet markets couldn’t move lower. We see this as a positive sign.

Turning our attention to the sectors and the industrials space was the standout performer, rising 2.2%. On the back of yesterday’s strong result from Leighton Holdings, the buying continued among the construction and services firms with United Group and Leighton Holdings leading the sector higher, up 4.6% and 3.6% respectively.

In a comment from Macquarie Group, it said this morning’s result and outlook from United Group for 10% - 15% growth in FY11 was well flagged and factored into consensus forecasts. Macquarie said the outlook was positive but added that it expects there is some conservatism in United’s guidance. The firm’s EBIT margin expansion in services and infrastructure divisions appealed, particularly its recovery in its US services businesses, while the resources division had a record EBIT in the 2H.

Elsewhere, Downer EDI, Transurban, Toll Holdings and Qantas were all up between 1.6% and 3.9%.

Financials bucked mildly negative leads to enjoy a solid rise, gaining % after recent falls. Axa Asia Pacific led the way higher, rising 1.7% while the big four banks were all up between 1.1% and 1.7%. Macquarie Group added 1.3%.

After months of speculation, ANZ Bank said it's going to undertake due diligence on a majority stake in Korea Exchange Bank. ANZ said it's looking at a 57.27% stake in the Korean bank, which is worth US$3.8 billion on current market values. The stake is made up of interests in Lone Star (51.02%) and Export-Import Bank of Korea (6.25%). There's no certainty a deal will proceed and CEO Mike Smith has demonstrated his ability to walk away from potential deals if they don't fit ANZ's strict criteria.

The consumer discretionary sector put in a good performance, advancing 1.2%. Ten Network, West Australian News, Tattersalls and David Jones were the major movers, all up between 1.6% and 3.7%.

Despite positive overnight leads from the US and London, the materials sector couldn’t get firing today, only managing a gain of 0.6%. Fortescue, BHP and Rio topped the leader board, all higher between 0.5% and 1.6% while gold miners Lihir and Newcrest added 0.5% and 0.1% respectively.

BlueScope Steel was the worst of the majors, down 2.5% after Credit Suisse cut the steel makers target to $2.95 from $3.73 and said the strong results were tax-rate driven and are not assumed to support FY11. The broker cut its FY11 and FY12 earnings estimates by 21% and 25% respectively on lower margin expectations across the business. Credit Suisse said short term, BlueScope offers ever increasing leverage to rising HRC prices and volume recovery on a declining but substantial fixed cost base. The broker maintained its outperform rating.

Onesteel had an ordinary session as well, declining 2.2%. Its FY result was largely in line with market expectations and company guidance. Net profit rose 12% on year to $258 million, with the more closely watched underlying profit coming in at $241 million. However, the group warned the recovery in its international and domestic markets stalled in May and June, and continues to affect its domestic steel business. The result was also dragged down by the planned closure of the group's Whyalla blast furnace in 4Q, which had a negative impact of $17 million on its profit line

Ben Potter
Market Strategist
IG Markets

ENDS

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