Australia | Oct 21 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market continued the positive sentiment and delivered a small positive in line with US markets. Recent downgrades to growth outlook in almost every region will continue to drive global and local investors back to Aussie bonds and Aussie equity dividend yields due to the substantial yield premium to the rest of the world. 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.) with inflation under control, so that they can cut rates in mid-2015 to stimulate a stagnant domestic economy. We are seeing more economists beginning to argue the case for a rate cut in 2015 with tidal wave of unemployment, rising cost of living and falling standard of living expected in the next 12-18 months. We remain negative on the domestic economy and expect global interest rates to remain low atleast till 2015Q3. We ontinue 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 to global growth which is already expected to remain anaemic for atleast another 12mths. Interesting stock of the day was VED with PEP supposedly wanting sell out of their stake last night and then deciding to hold on. We do like the stock, but this was badly handled given that market was not expecting this trade for a while. The stock is now under selling pressure and unlikely to see any big marginal buying support till we have clarity on the overhang.
Medibank Private IPO will drive some selling in the healthcare and insurance sectors as funding source…may open up more value…keep your eye open for quality stocks on a bargain. Another sector worth looking as a short term trade on technical is gold equities….spot gold above $1240…preferred players GOOD – NST, BAD – BDR and UGLY – NCM.
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 0.11% with turnover was just above $4.4bn. S&P/ASX 200 closed at 5325, up 5.60 points.
Macro Events: Tonight – US existing home sales. Tomorrow – Australia consumer price index; US consumer price
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