Australia | Sep 18 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market finally raged against the trend and the selling pressure from global investors to deliver a slight positive day. Australian volatility index finally had a negative performance day after hitting recent month high. We turned short term positive yesterday with market having a panic sell day before FOMC meeting. FOMC delivered a bit for everyone like a restaurant menu…indicated 2015 interest rate level slightly up for the bears and same wording for the bulls.
The markets globally are in uncharted territory in regards to money printing, interest rates, currency manipulation, low inflation, low growth, high unemployment and real wages decline. China is providing more liquidity and rate cuts to stimulate domestic spending while Euro is expected to deliver substantial QE. Given the recovery is mainly in US, and that is below trend, it is hard to see the rest of the regions not taking a belting on growth without extra help as US winds down. Central banks once again have coordinated the handover of liquidity from one region to another to keep the show going.
Global investors are selling out of Australia on the currency worry. As that selling subsides, we should see local buying come back. I don’t think any move by US Fed is going to be substantial till most of the concerns regarding sustainable recovery are solved. Market is now stuck trying to switch from yield to growth…but the problem is there is no marginal improvement in growth. Any stock with growth has already priced to optimum level while global macro keeps deteriorating. We expect the market to get back to good quality growth and yield stocks after recent selloff. BHP and RIO remain buy ideas when you look at the supply/demand and volume/margin dynamics. Given the drop in energy prices and the valuation of the energy stocks, STO and WPL are likely to see selling pressure to fund BHP and RIO. AUDUSD held just below 90 cents and we expect it to hold around these levels in the short term and then slide down to mid 80’s. Domestic economy is struggling and the online stocks deliver global growth…CRZ and IPP are the best bang for your buck…we see decent upside for both.
Regular readers would know that when RBA was given nearly $9b from the Treasurer, we said it was a currency punt…give it to RBA to hold it in non-AUD, blame Labor, release the budget, hit
consumer confidence and watch the currency fall with recovering US…now it’s all about how to collect it back…Fairfax has picked up on this trade too….it is what you call an 80’s broker trade.
Trading idea of the day: BlueScope Steel (BSL) – BSL is a flat steel producer and supplier of steel products and solutions focused on the global building and construction markets. It operates in four main geographical regions being Australia, New Zealand, Asia and North America. We see the stock re-rating to $6.30 with low Iron Ore price and depreciating currency after years of structural changes and cost out programs. Given the improved balance sheet and operational efficiency of BSL compared to the margin pressure on small cap Iron Ore miners, BSL is currently placed well in any consolidation in the sector.
Market Move: Aussie market was up 0.16% with turnover was just below $6.0b.
Macro Events: Tonight – Scotland vote on independence, US August housing starts. Tomorrow – RBA Bank Bulletin, US August
leading index, NZ ANZ September job ads.
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