Australia | Oct 18 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market continued the positive sentiment despite falling Iron Ore, rising geopolitical risks and high global market volatility. Recent trading in US shows it has dropped nearly 10% from 2014 high to recent lows while Germany has pulled back over 20% and UK over 13%. Global markets have had their correction they needed to have and now we expect them to stabilise and then recover with their growth plans.
Recent downgrades to growth outlook in almost every region will continue to drive global and local investors back to Aussie bonds and equity dividend yields due to the substantial yield premium to the rest of the world. The flow of money will continue to search for the highest yield with the lowest risk….expect it to come back to Australia soon…we feel that is already happening. We are currently trading just above long term fair value multiple while offering substantially good yield and recovering currency. We continue to expect AUDUSD to move from 87 to 90 cents in the short term as global investors come back into Aussie markets (i.e. reverse the September trade) and then gradually come down to 85 cent level as the domestic economy deteriorates.
We continue to feel that RBA is currently trying to curb asset prices (i.e. house prices, equity markets etc.), so that they can cut rates in mid-2015 to stimulate a stagnant domestic economy. RBA has taken the mantle from the government on the negative campaign to reduce risk and deliver stimulus. They are not being helped by the government delivering big hits to consumer confidence at every turn while allowing more avenues for foreign investment to feed through to inflate the already excessive housing bubble problem. If you need more confirmation of what the market thinks about consumer sentiment, look at discretionary retail stocks like JBH, SUL, TRS, MYR. They have been beaten up 30-50% while housing related HVN is on the way down…we see HVN getting below $3.
We remain negative on the domestic economy and expect global interest rates to remain low atleast till 2015Q3. We continue to see risk to commodity prices and expect the new equilibrium levels to put pressure on the margins of the high cost producers and the mining services sector. Even with stimulus in China and Euro, we see substantial risk with global growth remaining anaemic for atleast another 12mths.
Domestic politicians continued to be caught in the 24hr media cycle while forgetting the big picture. Both parties are sticking to their rhetoric and finger pointing rather than solving problems. Sadly the opposition is now doing what the government did when they were in opposition…no solutions and plenty of slogans. The government is now stuck breaking promises, delivering even more slogans, running bigger debts, hurting consumer confidence and unable to sell any structural change or step above the noise and lead the public with them. Public are sick of vested interest groups in both parties walking into inquiries and committees that deliver biased views. Just to add some colour to the recent Ebola arguments…Australia’s total new spend to fight Ebola is less than what is expected to be spent in Iraq over 2 weeks. To put that into context, Ebola is the biggest risk to global economies and equity markets in the next 3mths.
Trading idea of the day: CarSales.com (CRZ) – CRZ is a global online car classified business model now moving into related financial services. It is now trading below $10 and we see the stock re-rating to $12.50 in the near term as the market’s search for growth in global growth downgrades. The free cashflow generation of this model allows CRZ to keep acquiring and growing globally.
Market Move: Aussie market was up 0.32% with turnover was just above $4.3bn. S&P/ASX 200 closed at 5271.7, up 16 points.
This document has been prepared and issued by:
Baillieu Holst Ltd
ABN 74 006 519 393
Australian Financial Service Licence No. 245421
Participant of ASX Group
Participant of NSX Ltd
Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).
Disclosure of potential interest and disclaimer:
Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time.
No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd. Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a
judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in
this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
