IG Markets - Australian Market Wrap 22, July 2010

IG Markets - Australian Market Wrap

Across Asia, regional markets are mostly lower this Thursday as negative overnight comments from Federal Reserve Chairman Ben Bernanke damaged sentiment and confidence. The Nikkei 225 is the worst performer, down 0.8% while the Kospi and Hang Seng are lower by 0.7% and 0.2% respectively. The Shanghai Composite is bucking the trend to be firmer by 0.2%.

In Australia, the ASX 200 fell 0.9% to finish the session at 4374.7, its low of the day. On the session, it was the financial sector that detracted most of the points, while the healthcare and industrial sectors were also convincingly underwater The materials and energy sectors managed to post modest gains.

Bernanke’s comments have really weighed on sentiment. They’ve confirmed, at least in the short-term that we continue to be at the mercy of US leads. We’re seeing a pattern of busy opens followed by mundane, boring price action over the remainder of the session.

Whilst US markets were disappointed that Bernanke did not announce further stimulus measures, we think it was actually a positive move. Over the last 18 months we feel the market has probably become too accustomed to government stimulus and backstopping.

The economy needs to get to a point where it can stand on its own two feet. Not every economic soft patch needs government intervention, remembering that at the end of the day, what goes in must eventually come out.

Turning our attention to the market and it was the financial sector that did most of the damage, falling 1.8%. Commonwealth Bank and QBE Insurance were the biggest decliners, losing 2.4% and 2% respectively while the remainder of the big four banks were down between 1.6% and 1.8%. Axa was the best relative performer, only losing 0.7%.

Industrial names saw significant selling pressure too, with the sector declining 0.8%. Leighton Holdings, Brambles, Asciano and Qantas were all weaker between 1.5% and 2.1%. Downer EDI continued to buck the trend, rising 1.2%.

The Consumer discretionary sector followed its US counterpart lower, giving up 0.7%. News Corporation fell the most, down 1.9% while Aristocrat Leisure, Ten Network and Billabong were all softer between 1.1% and 1.7%.

In a broker report from Citigroup, it boosted its rating on Ten to buy from hold on valuation grounds. Citi said structurally, it’s comfortable with Ten, but cyclically, it has concerns as TV ad growth looks to have peaked in 2H10, and the potential downside risks to the economic (and advertising) remain. However, the broker believes these concerns are already priced into the shares. Citi raised its TV advertising growth forecast for 2H to 20% from 15% previously, giving Ten revenue growth of 9.5% and bumping its target price up to $2.10/share from $2.01.

On the upside, the cyclical energy and material sectors managed to add a few points, rising 0.2% and 0.1% respectively. Bluescope Steel, BHP and Rio Tinto all rose more than 0.3% while Gold players Kingsgate Consolidated added 0.8%, despite a broker downgrade.

In a report from Royal Bank of Scotland, it downgraded Kingsgate to hold from buy, with its target price cut to $9.57 from $12.00. The broker said the downgrade was primarily due to execution risk over its planned IPO of 50% of the Chatree project on Thai exchange and investment from proceeds in a further acquisition. RBS said the proposed transactions "will shape Kingsgate for years to come" and thus removes 20% premium to valuation from its target price. The broker added that while they're "cautiously optimistic" given management's ability, "the history of company changing transactions is littered with unfortunate decisions". RBS said Kingsgate’s 4Q gold production was in-line with its expectations, lifting NPAT forecast for FY10 by 21% due to strong gold price. However, RBS notes the IPO will be a "leap of faith" for shareholders.

Among energy names, WorleyParsons and Caltex led the group higher, advancing 4.2% and 1.1%. Santos was the biggest decliner, losing 1.5% after announcing its production numbers.

As expected, Santos’ 2Q production was down 11% on-year after the company downgraded FY production guidance earlier this year following flooding disrupted operations in the Cooper Basin. Any fears another downgrade could be on the cards was arrested today after it reiterated FY production guidance of $49-$52 million BOE. So far it's notched up $24 million BOE, implying it expects to produce more oil and gas in the second half of 2010, which makes sense now that the floods have subsided. However, investors may be a little disappointed there's no breakthrough yet in customer negotiations for Gladstone LNG JV. Santos also flagged an increase in its annual production cost guidance to $560-$580 million from previous guidance of $540-$560 million. This however, will be offset by a reduction in expected capital expenditure to $2.3 billion from $2.6 billion and a lower expected royalty-related tax expense of $70-$90 million from $90-$110 million.

Ben Potter
Market Strategist
IG Markets

ENDS

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