Australia | Jun 13 2014
By Mathan Somasundaram, Baillieu Holst Quant Strategy
Summary: Aussie market pulled back with global lead over Iraq worries and soft US data. Aussie market closed down 0.44% while turnover was just above $6.5b. Today was a solid negative day on very good volume. We see the local market now looking to reduce their exposure and wait for value to return to the market and June to end. Gold stocks had a cracker day today.
Top 10 reasons why you should take profit and wait for July (from this morning)
o Expect Iraq risk to remain for an extended period and drive up energy costs and create risk to global growth
o Good US growth outlook, Improving Japan and Euro stimulus already in the price
o Volatility measures are at relatively low levels and expect it to rise
o China risk and Iron Ore dropping to $91.50 will drive more risk to Resource and Mining Services sector
o Falling consumer sentiment hitting all cyclical consumer sectors and property prices
o Tax loss selling of big underperformers and big winners by June 30 expected
o Institutional Investors taking School Holidays off will reduce market exposure by Jun 30
o Government risk to consumer sentiment with more budget marketing and new welfare plans coming
o Currency and market valuation stretched with market expecting more downgrades
o It’s Friday the 13th and we have not heard anything from Putin for a while!!!
FIFA WORLD CUP WINNER: Due to the temperature and humidity, history shows that when it’s played in Europe it favours European countries while anywhere outside it favours South American countries. Since it’s a multi-layer group knock out competition and not a straight out horse race, any factor based ranking very rarely works. Brazil, Germany, Argentina and Spain should make it to the last 4. My pick is for Brazil to beat Argentina in a South American Classico Final. My best hope for Australia is to go out and play attacking football and score a goal against Chile. Spain and Dutch are in a different class to Australia. We have a young side and they will grow through the experience.
M&A Cycle: Businesses with strong cashflow and solid balance sheet in a falling consumer sentiment and low interest rate environment prefer to chase growth through cost cutting, share buy backs and M&A. Cost cutting cycle is coming to an end with further improvements requiring wage reduction or M&A. Wage cuts will take time to work through structurally and also will have political implications for the government. This leaves corporates either buying back shares or consolidating industries to drive better earnings per share growth. Private equity is sitting on the side lines with substantial war chest built up by floating number of stocks over the past 6-12 mths. M&A candidates in media sector are TEN, SXL, PRT and APN likely prey while NWS, NEC and SWM are potential hunters. M&A candidates in retail sector are DJS, MYR and PBG are likely prey while Private Equity, PMV and global retailers are potential hunters.
Consumer Confidence: Tidal waves of unemployment coming in the next few years, rising cost of living pressures and budget worries have slammed consumer confidence down to multi year low. Recent Job Ads and Employment data further strengthens our argument that unemployment is going to get worse in the next 12-18mths. We continue to be negative on local cyclicals with slowing economy. Continued bickering, party politics, lack of long term planning and real policy reform will keep sentiment low. We expect the unions, pensioners and students to continue to keep the media fuelled for months to come. We expect the government to release the new welfare streamlining plans and I am sure that will get media attention and likely to be a further risk to consumer sentiment.
Property Prices: We continue to expect areas where substantial unemployment and middle to low income earners live (i.e. Canberra) to see property price decline in the next 1-2 year time frame while middle to higher income areas should trade sideways with affordability falling and rates remaining unchanged. The top end should continue to rise with overseas investors from Europe and Asia continuing to look at Australia as a safer location to park wealth. Recent housing finance data is beginning to show signs of affordability and consumer confidence taking effect. In a longer term thematic, we expect future generations to prefer renting than buying property with rising cost of education, housing and lower wages to make housing affordability harder without substantial assistance from their parents.
Tax Loss Selling: Be aware that we are headed for tax loss selling period where substantial underperformers/outperformers are likely to see selling pressure and open up buying opportunities. But be careful to not sell cyclical low stocks as they may become M&A targets very quickly as private equity is cashed up after number of floats.
Currency Outlook: We maintain our view that AUDUSD will settle around 94 cents (i.e. remain in 87-94 cents band) in the short term and then track down to mid 80s. We need to see substantial US or China growth risk for currency to break the recent trading pattern…now 94.2 cents.
Interest Rate Outlook: We maintain our view that our rates will remain unchanged at the current low level atleast till 2015Q2. We have to see substantial collapse of consumer sentiment from current low levels to force RBA to change lower. RBA can’t afford to support any more asset bubble inflation with lower rates despite global Central Banks keeping rates at historical low levels.
POINTS OF INTEREST IN S&P 300 STOCKS BY SECTOR:
• Energy stocks were mainly positive with oil price jumping. We maintain our preference to the bigger players such as STO and WPL with OSH improving with recent upgrade. Big moves> UP: DLS (+7%), MAD (+5%), WHC (+4%), SEA (+3%); DOWN: PDN (-3%)
• Material (Ex Mining) stocks were slightly negative. We maintain our preference to packaging stocks such as AMC and ORA while NUF beginning to look good on the long term food thematic and ABC and DLX on the housing cycle. Big moves> None
• Mining (Ex Gold) stocks were mainly negative with falling Iron Ore. We maintain our preference in the big miners BHP (-1.18%) and RIO (-1.91%) while ILU is coming back into the picture with recent updates and management outlook. Big moves> UP: BRL (+4%); DOWN: AQA (-12%), TGS (-12%), BCI (-8%), FMG (-6%), MGX (-4%), AGO (-4%)
• Gold stocks were on fire. We continue to like low cost producers like NCM, BDR and SAR with spot gold price heading back to $1300. Big moves> UP: TRY (+10%), SLR (+9%), OGC (+8%), SAR (+8%), AQG (+8%), PIR (+7%), PRU (+7%), IAU (+6%), KCN (+5%), EVN (+4%), SBM (+4%), RSG (+3%), BDR (+3%)
• Industrial stocks were mainly negative. We maintain our preference in CCP and SEK. We continue to see high risk in mining service companies due to China risk, commodity price volatility and resource sector capex decline from 2015. Big moves> UP: MAH (+5%); DOWN: ANG (-7%), TSE (-4%), SKE (-4%), SEK (-3%), BKN (-3%)
• Consumer stocks were mainly negative. We maintain our preference in ALL, FLT, AGI, SWM, SXL, PRT and TGA while remain a fan of other media stocks like TEN below 27 cents despite the problems and APN on M&A. We also like CTD on any pullback below $6…it’s a FLT in the making. We see big risk to discretionary retail stocks like DJS, HVN, JBH, MYR, NCK and TRS in falling consumer sentiment. Despite the downgrade FLT looks good value long term for global tourism exposure with recent pullback below $47. Despite the downgrades we like PBG due to the brand value and on GARY valuations. Big moves> DOWN: BBG (-6%), WEB (-4%), PBG (-4%), RCG (-3%)
• Staple stocks were mainly flat. We maintain our preference in WES and WOW. SHV is beginning to look interesting close to $5 with Asian low fat protein demand. There was a big line of 30m shares in CCL was put through today from an overseas holder to multiple institutional investors. Big moves> DOWN: MTS (-4%)
• Healthcare stocks were mainly negative. We maintain our preference in ANN, RMD and our pet favourite GXL. RHC is a buy on any pullback with population ageing and government cutting healthcare budgets. Big moves> UP: ACR (+4%); DOWN: PBT (-5%), BNO (-3%)
• Banks stocks were slightly negative and continue to hold up the index from falling further. We maintain our preference in ANZ and NAB as they offer best global exposure out of the big four. Big moves> UP: MOC (+4%)
• Diversified Financial stocks were mainly negative. We maintain our preference in MQG for the global exposure while HGG and BTT are worth a look on any pullback. Big moves> DOWN: TRG (-4%)
• REIT stocks were slightly negative. We maintain our preference in SGP and LLC to get housing and construction exposure while MGR, ALZ and DVN look interesting with housing exposure. Big moves> None
• IT stocks were slightly negative. We maintain our preference in CPU while remain big fan of CRZ and IPP in the long term. Big moves> UP: ALU (+4%); DOWN: IPP (-3%)
• Telco stocks were slightly negative. We maintain our preference in TLS while remain big fan of TEL and IIN in the long term. Booming NZ economy should put more attention into recovering TEL. Big moves> None
• Utility stocks were mainly flat. Big moves> None
• Overall negative day on very good volume.
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