IG Markets - Australian Market Wrap August 24 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mixed this Tuesday following yet another set of weak leads from the US where investors continue to be concerned over the pace of economic growth. The Nikkei 225 is the worst performer, down 1.4% and hitting a fresh 15-month low this morning as exporters were pounded by the yen’s strength. Elsewhere, the Hang Seng and Kospi are 01% and 0.4% lower respectively. The Shanghai Composite is beating to its own rhythm, up 0.9%.

Locally, the ASX 200 closed the session 1.1% softer at 4381.3, just off morning lows of 4378. Consumer staples, materials and financial names did most of the damage, hampered by weak offshore leads and disappointing earnings reports. Political uncertainty continues to cloud the market, with few traders willing to put their hard earned to work.

At the risk of sounding like a broken record, we’ve seen much of the same again today, with the uninspiring earnings season continuing. On top political uncertainty, the unanimously cautious outlook is giving investors very little reason to rush into equities. When you can get a risk free 7% return, why would you bother?

In an interesting strategy piece from Macquarie, it believes the Australian equity market is well into a cyclical recovery, with valuations still favourable, although the outlook is "very skewed". Macquarie adds that the resources are leading on the back of a strong recovery in commodity prices, while the industrials earnings recovery remains very moderate with only a minority making real headway. The broker believes investors are still suffering post GFC nerves, with risk premiums remaining high, resulting in most of the market being undervalued, especially the major resource stocks. It thinks the earnings outlook still suggests a strong recovery over the next year, though the timing has been deferred somewhat in industrials, compared to 3 months ago. Macquarie believes the markets are trying to rebase valuations globally to reflect an environment of higher risk, reflecting political pressures for tighter regulation and heavy intervention, higher taxation, and higher public spending. In other words, the broker believes the world and Australia are returning to 'big and sharp' economic cycles seen in the 1970s and 1980s.

The consumer staples sector was the biggest drag today, declining 2.1% on the back of Fosters result and Wesfarmers going ex-dividend. They fell 4.3% and 3.4% respectively. The beverage giant shed some of yesterday's gains after this morning reporting a FY net profit of $698.3 million, excluding the write-down on its wine assets vs analysts’ expectations for $673.6 million. In a comment from Goldman Sachs, it said the US wine result was better than expected and that the beer result was broadly in line with expectations. In a separate note from Macquarie, it kept its underperform rating on the beverages company, and a $4.99 price target based on valuation grounds. The broker believes that in the absence of a "rogue bidder", it does not see Foster's as a contestable asset. Macquarie also viewed the outlook commentary as vague, with management flagging poor market conditions for both the beer and wine businesses. However, Macquarie is hopeful that internal improvements will drive business performance.

Following a night of disappointing leads, material stocks came under pressure too, with the sector closing 1.3% lower. Fortescue, Alumina, BHP Billiton and Rio Tinto were the major detractors, all down between 1.5% and 3%.

Financials were another group to finish firmly in the red, declining 1.1% for the session. Macquarie Group and Westpac Banking Corporation topped the list of fallers, down 2.5% and 2.9% respectively. The remainder of the big four banks were all weaker, down between 0.5% and 1.9%.

In a broker report from Deutsche Bank, it trimmed Westpac’s target price by 5.1% to $25.62 from $27.00 following yesterday's 3Q trading update, which analysts believe isn't enough to drive outperformance. Deutsche said that whilst there were some positive trends emerging, such as a stabilising margin, normalisation in treasury as well as improved growth in retail, business banking and St. George Bank, Deutsche believes the market is unlikely to pay for this improvement until it is delivered. The broker added that the update did little to alleviate the market concerns around Westpac's revenue growth and margin pressures.

After another 1% fall in crude oil prices overnight, the energy sector retreating, losing 0.9%. Origin Energy, Oil Search, WorleyParsons, Santos and Whitehaven Coal were among the worst performers, all falling by more than 0.8%. Caltex outperformed, adding 6% to be one of the session’s best performers.

Oil Search lost ground despite reporting a 1H profit of US$52.9 million, up 49% on higher oil prices, and beating the US$47 million average of five analyst forecasts compiled by Dow Jones Newswires. Although still in its early stages of construction, the fact that the US$15 billion cost estimate and 2014 completion target for its PNG LNG project remains unchanged is good news. Oil Search has a 29% stake in the Exxon Mobil-led development, which is being constructed in a politically challenging, geographically rugged environment. "During the second half of the year there will be significant and increasing activity on all of the PNG LNG work fronts," Oil Search said.

Macarthur Coal spent the session in a trading halt after announcing it planned to raise $400 million to buy a coal project from Stanwell Corp., a Queensland state-owned energy utility.

On the upside, the typically defensive telecommunications, property trusts and healthcare sectors outperformed, adding 0.9%, 0.6% and 0.2% respectively.

Ben Potter
Market Strategist
IG Markets

ENDS

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