IG Markets - Australian Market Wrap Sept. 28 2010

IG Markets - Australian Market Wrap

In Asia, regional markets are all lower in early afternoon trade as traders react to the weaker leads from Wall St. Markets seem to have paused for breath, digesting the strong September rally. The Nikkei 225 is the biggest decliner, down 1.1% as participants remained nervous on prospects of further yen intervention. Elsewhere, the Shanghai Composite, Kospi and Hang Seng are all softer between 0.1% and 0.7%.

In Australia, the ASX 200 finished 0.1% lower at 4669.8 after trading in a tight range for most of the day. The late session drift on Wall Street saw the local market open on the back foot, but it quickly clawed back modest losses to move into neutral territory. The information technology, telecoms and financial sectors led the advances, helping to offset weakness among material, consumer staple and energy names.

Following the overnight leads, the local market seems to have ‘paused for breath’ today. It looks like investors are willing to step back and digest the stellar September run. Nonetheless, it looks like a lot of participants are viewing weakness as a buying opportunity.

There has been a marked change in sentiment since the beginning of the month. When the market was range bound, traders and investors shortened their time horizons and looked to buy near support and sell near resistance. Since the uptick in global economic data, this sentiment has shifted. Now we’re seeing participants positioning themselves for a more sustained uptrend into the end of the year.

Any weakness, such as this morning’s is now being seen as a buying opportunity. This has been evident recently as buyers have been looking to ‘buy the dip’, especially after lower opens. Also, instead of pulling back after a strong rally, the market is merely consolidating, with very little evidence of active selling.

In an interesting strategy piece from JP Morgan, it cut its June 2011 target for Australia's S&P/ASX 200 index to 4750 points from 5000, believing the nation's economy is at risk of overheating. JP Morgan believes an economy approaching capacity constraints is generally a tough environment for stocks because something has to go wrong. JP Morgan said "If the pressure is eased by slower growth, earnings expectations are vulnerable. If the economy remains robust, rates have to rise - bringing the risk of a more severe downturn than the central bank bargained for”. The broker believes that commodity investment will test the economy's limits and will be largely insensitive to anything the RBA does. JP Morgan also added the political environment suggests that fiscal policy is unlikely to help, leaving the adjustment to be borne mainly by consumer and housing activity. JP Morgan also noted that the downside risk from a house price correction is more plausible than many think; against this background it is hard to see what can go right for stocks linked to discretionary consumer spending.

Turning our attention to the market and the materials sector was the biggest drag today, losing 0.5% Bluescope Steel declined the most, down 0.9% while the likes of Newcrest Mining, Alumina, BHP and Rio Tinto were lower between 0.2% and 0.8%.

In reports from both Macquarie and UBS, they said a site visit to BHP's Escondida mine in northern Chile, world's biggest copper mine, suggests the company is ready to ramp up production over the next few years. UBS said that “according to BHP, FY11/12 marks the turning point for copper growth," with the company targeting 1.2 million tons/year of production from Escondida alone over the next 5-7 years, "in line with our forecasts but perhaps a surprise to some". Macquarie said it sees group copper output, excluding Australia's Olympic Dam mine, up 25% over the same time period. UBS continued saying, it believes "the market (is) seemingly underestimating the potential exploration upside" at Escondida, while Macquarie argues the visit "clearly rebutted suggestions from some quarters that the company's copper operations are mature and simply fighting grade decline". BHP CEO non-ferrous Andrew Mackenzie confirmed FY11 will be a weak year for Escondida; but improving grades and the removal of bottlenecks will see improvements at the Chilean mine from 2011.

Elsewhere, gold miner Kingsgate Consolidated gave up 4.8% following a broker downgrade.
In a report from Merrill Lynch, it lowered Kingsgate to underperform from neutral after the company warned the current quarter production from its Chatree gold mine would be 22,000 oz, below the expected 28,000 oz. While Kingsgate notes that FY11 guidance remains unchanged, Merrill believes the September quarter delay creates downside risk to this. Subsequently, the broker lowered its FY11 forecasts to the lower end of guidance. The net present value valuation was only reduced to $7.82/share from $7.89/share. However, Kingsgate’s share-price run-up on takeover speculation means the gold miner is well above Merrill's $10.75 price target, closing at $12.00 Monday. Merrill does not believe Kingsgate warrants a premium to NPV of 1.5x, with 1.1x - 1.3x seen as more likely.

Elsewhere, the energy, consumer staples and consumer discretionary sectors were all down between 0.2% and 0.4%.

On the upside, the financial sector bucked weak overseas leads to add the bulk of the points. It rose 0.1%. AMP topped the leader board, gaining 1.2% while the big four banks were mostly stronger between 0.3% and 0.5%. Commonwealth Bank of Australia fell 0.5%.

In a broker comment from Merrill Lynch, it believes National Australia Bank's ratings recovery is more entrenched. The broker reiterated its buy rating on the stock and maintains NAB as its number one pick in the sector. Merrill said that, moving forward, NAB is set on the way to an improved rating with the bank continuing to trade on a 15% PE discount to its peers based on Merrill Lynch FY11 forecasts; Merrill think investors will be sensitive to catalysts that might justify an improved rating. It also believes that NAB’s walking away from the AXA APH acquisition was the first step in easing the share price drag; NAB has outperformed by 2% since

Elsewhere, Macquarie Group finished unchanged after CEO Nicholas Moore spoke at a conference in Sydney. CEO Nicholas Moore said he sees emerging markets as the growth engine that will "more than offset the weakness" from Europe and the US over the next few years. On a panel at the Forbes Global CEO conference about navigating the recovery, Moore touted the group's exposure to the emerging market economies despite the fact that some of the group's more recent acquisitions have been in the slower growing US and European markets. Moore said the infrastructure cycle, specifically when governments look to the private sector to step in with infrastructure development, has been "a little softer globally than we would've expected".

Ben Potter
Market Strategist
IG Markets

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