Australia | Sep 16 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market maintains the negative rage despite an Iron Ore recovery. We continue to be negative in the short term as the markets had run ahead of valuation, rising geopolitical risks, China tightening, stocks going ex div, escrow shares taking marginal buying and ECB delivering nothing new for now. The market is currently waiting for clarity from US Fed on their interest rate outlook expected in the next 2 days.
We are also heading toward school holiday break at the end of the week when the market will be handed over to predominantly retail investors. Iron Ore recovered above US$85 and the question is where to next? Will it build up or fall again…flipping coin.
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 above 90 cents after recent big move. RBA keeps warning about house prices but Treasurer does not seem to agree. He must be valuing it based on the budget fairness and structural change measurements. Government is now blaming FIRB for overseas investors pushing up house prices. The basic issue is that housing sector is the only sector, outside mining, doing well. It’s not in the interest of the government, RBA or property sector to question it. So, it is important to pay attention when RBA warns against housing bubble. We continue to feel the unaffordability issues, unemployment tidal wave and oversupply of units will turn the tide of house prices in the next 12mths.
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. Globally FOMC comments will dictate interest rate outlook and it may start a short wobble, but we continue to feel that the markets will get over the interest rate cycle similar to tapering. If you go by what the government can’t discount, the Iraq war is substantial and likely to go into Syria…some may say history repeating itself…but it has moved from dropping food to bombs very quickly… at this pace we should confirm land forces by weekend. Between the falling commodity prices, senate debacles and cost of war, Treasurer will have to deliver his first downgrade after his first budget…off to a flying start…no debt reduction, no solutions…just more deals.
I fear this trend from the former government is likely to continue with the current establishment as well.
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 down 0.51% with turn over was just above $4.9bn.
Macro Events: Tonight – US August producer prices, US Federal Reserve FOMC begins two-day meeting. Tomorrow – August imports of goods, US Federal Reserve FOMC concludes two-day meeting, US August consumer price index, NZ Q2 current account balance.
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