Australia | Oct 29 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market ex banks was positive with global sentiment while banks pulled the index flat. Banks were sold down pre sector reporting season. The global markets will hold their breath to see what US Fed will deliver tonight. Markets are expecting the end of QE and clarity on interest rate outlook. Given that ECB has not delivered their own QE, US Fed might surprise everyone and keep some QE in order to keep USD devalued. In the world of currency wars, there is no honour among Central Banks. We shall wait and see the “Yellen Show” tonight.
SXL was up 13% with number of brokers turning positive recently after the stock was belted over downgrades and debt worries. We remain a fan on the bottom of the cycle valuation with solid yield. JBH popped 9% on short covering after they maintained their sales guidance. Given that they are below pcp growth rates despite number of top brand product offering being released, we find it hard to see them deliver above pcp growth rates with macro headwinds into Christmas. Prefer DSH over JBH with better valuation and better store rollout growth plans. As a wise old man once said, you buy retail stocks when rates are going up…we are not in that environment. IPP got whacked 16% after quarterly data…early stage story…we expect market to look at the bigger picture and re-rate this stock soon. VET got hammered again by 8%…more bloodletting after yesterday’s downgrade. DMP pulled back 6% after a great run and mainly as expected result. Baillieu Holst analyst Josh Kannourakis put a Sell recommendation on valuation basis after the result.
Currency: We continue to expect AUDUSD to move from 87 to 89 cents in the short term as global investors come back intoAussie markets (i.e. reverse part of the September currency trade) and then gradually come down to 85 cent level as thedomestic economy deteriorates.
Interest Rate: We continue to feel that RBA is currently trying to curb asset prices (i.e. house prices, equity markets etc.) with inflation under control, so that they can cut rates in mid-2015 to stimulate a stagnant domestic economy. More brokers arepushing back rate rise in Australia well into 2015, but we see no rate rises till 2016. It is not hard to realise that the tidal wave of unemployment, rising cost of living and falling living standards are going to make consumers save more and spend less.
Trading idea of the day: CarSales.com (CRZ) – CRZ is a global online car classified business model now moving into related financial services. It was 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. Good move today above $10 after AGM…more to come.
Market Move: Aussie market was down 0.09% with turnover was just above $4.9b.
Macro Events: Tonight – US Federal Reserve meeting. Tomorrow – Australia new home sales, export and import prices, national
accounts; US economic growth.
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