IG Markets - Australian Market Wrap August 23 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mostly lower following the weaker offshore leads from Wall St, as well as the uncertainty of a hung parliament in Australia. The Nikkei 225 is the worst performer, down 0.8% while the Hang Seng and Kospi are 0.4% and 0.3% weaker respectively. The Shanghai Composite is bucking the broader trend, higher by 0.1%.

In Australia, the ASX 200 finished the session 2 points lower at 4429, with the market seemingly divided as to who will form the new Federal Government. The prospect of a Coalition win boosted the materials and energy sectors who might have managed to escape Labor’s mining tax, while a disappointing trading update from Westpac saw the financial sector as the biggest drag on the market.

Obviously the big talking point is the hung parliament, the first one in 70 years. With it comes great uncertainty, which is the markets worst enemy. There’s no doubt the weekend’s result will add to investor nervousness in the short-term, and possibly longer depending on how the government ends up being formed. Worries about less decisive policy making and concerns over less friendly business stance from the Greens, who were the big winner on Saturday are likely to be some of the major issues.

When the markets closed on Friday, it was widely believed that the mining tax would have become a reality by now. How things change! A hung parliament has thrown this into disarray Should the Coalition form a minority government, the change will the abolition of Labor’s proposed mining tax, which should have positive implications for the nations miners, as well the broader equity market. We would also expect to the see the AUD well supported under such a scenario as foreign investment is likely to be attracted by a more pro-business government.

On the other hand, equity markets largely reflected an assumed Labor victory. Given this, if Labor were to form a minority government, we’d expect a much more muted market response, possibly a downside bias with the mining tax becoming a reality.

With it likely to be a number of days until the result is known, markets are likely to tread water as both local and offshore investors await clarification as to who will form government and whose platform of policies will be adopted.

Financials were the major drag today, losing 0.3% after a trading update from Westpac Banking Corporation disappointed the market. Westpac was the worst performer, down 2.6% despite reporting a 27% improvement in its 3Q cash profit on year to $1.4 billion. However, the result was mostly driven by falling bad debt charges, with revenue lower by 1% from 2Q and its net interest margin also off by 2 basis points on the quarter to 2.17%. The weaker-than-expected result shows it's not immune to the trends exhibited by peers Commonwealth Bank and National Australia Bank in recent weeks. Like others, Westpac is finding revenue growth hard to come by. Meanwhile, ANZ continues to outperform, rising 0.8% after its 3Q numbers surprised on the upside.

Telstra dragged the telecommunications sector south after it went ex-dividend 14c. It finished the session 20c lower.

The energy sector finished the day flat after being weaker for most of the session, managing to shrug off Friday’s fall in Crude Oil prices. Whitehaven Coal was the worst performer, down 2.1% while WorleyParsons and Macarthur Coal were down more than 0.6%.

In a broker note from Citigroup, it cut Macarthur Coal to hold from buy, and lowered its target price to $13.00 from $15.00. The broker expects the PCI coal market weakness to hurt the company's profitability, believing the soggy coking coal markets are likely to see the PCI price come under pressure. In weak coking markets the PCI price trades at a deeper discount to coking coal. The broker cut the miner’s FY11 expected earnings by 17% based on lower PCI coal price assumptions. Citi also dropped its 2012 PCI coal price expectations, leading to a cut to FY12 earnings forecast of about 15%. Citigroup said with its forecasts of falling coal prices and earnings it is time to downgrade Macarthur. Whilst the coal sector performance has been strong of late, much of this has been on the back of M&A activity. Citi said that whilst Macarthur had an offer earlier this year, the complexities surrounding the deal indicate that the company is lacking bid support.

On the upside, the consumer staples sector was one of the best performers, rising 0.9% thanks to a strong performance in Foster’s shares. Fosters gained 7.6% amid renewed speculation of corporate interest in its beer business, although there are conflicting reports of when a bid might come.

London's Times newspaper reported over the weekend that SABMiller is eyeing a GPB7 billion bid for the beer business, which would be more than the Foster’s $11.25 billion market cap. However, another report in the Australian newspaper said SABMiller was unlikely to make an offer before the demerger. It’s hardly surprising to see renewed speculation about potential offers given Foster's had flagged it would be open to a possible sale post-demerger. The Australian believes there are three parties actively looking at Foster's beer operations: SABMiller, Japan's Asahi, and Canada's Molson Coors.

Elsewhere, materials names also added points, with the sector finishing 0.6% firmer. Alumina and Amcor were the top movers, up 2% and 1.2% respectively while Rio Tinto, BHP, Newcrest Mining and Lihir Gold were all up more than 0.5%. Shareholders today approved the merger between Australia’s two biggest gold miners.

Ben Potter
Market Strategist
IG Markets

ENDS

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