Australian Stock Market Outlook

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Fasten your seatbelts, UBS warns investors
THE AUSTRALIAN OCTOBER 18, 2014 12:00AM

Michael Bennet

Reporter
Sydney
UBS
UBS Australia chief Matthew Grounds. ‘It’s starting to feel in the last two to three weeks a little bit like — dare I say it — 2009.’ Picture: Britta Campion Source: News Corp Australia
UBS Australia chief Matthew Grounds has warned investors to brace for a bumpy end to the year as several “mini crises” roil ­markets, potentially dampening the traditionally busy pre-Christmas rush of floats as volatility ­reverberates around the globe.

Mr Grounds said recent weeks, while involving different circumstances, had felt like 2009 when it was common to awake and discover massive market gyrations.

Mr Grounds, who recently ­celebrated 20 years at UBS and said he was still very much ­enjoying himself, added it may be difficult for China to provide more stimulus given the concerns about fuelling the property and shadow banking markets. His comments come after US stocks this week posted their biggest intra-session slump since 2011, the price of oil tanked and the Reserve Bank warned of a ­potential “violent” correction in bond markets.

“We’ve got mini crises everywhere. There’s wars happening, Ebola, concerns about growth in China and Europe, and what the US Fed will do, so we’re sort of in the eye of the storm at the ­moment,” Mr Grounds told The Weekend Australian in a rare ­interview.

“It’s starting to feel in the last two to three weeks a little bit like — dare I say it — 2009. It’s not that, but we all remember it. I was in the States and got off a plane and someone sent me a text saying the Dow had fallen 600 points.

“US bond yields this week went below 2 per cent and everybody is saying ‘I don’t want to see that again’. Obviously the causes are very different now to in 2009 and Wednesday night looked like more of a hedge fund rout than anything else.

“But for us, there can still be opportunities when things get tougher, and as the execution risks increase, clients will seek out their trusted advisers.

“We have a history of delivering and getting things done even in periods of extreme volatility, which is what I’m really proud of.”

After a rough two months for investors, the stockmarket’s S&P/ASX 200 yesterday rose 0.32 per cent to 5271 points, putting gains for the week up 2.23 per cent as the banks fought back from their recent 10 per cent correction.

Mr Grounds said the Australian market had recently over­reacted amid currency and commodity price pressures.

He added he did not “buy into the bearish views” about the banks “at least in the short to ­medium term” and backed the Murray financial system inquiry to “land us in a sensible place”.

But Mr Grounds said uncertainty and big swings in markets were here to stay.

“We’re in that period of time where the big movements start to reverberate around the world, which will likely continue after the extended period of low volatility,” he said.

“Also, we’ve got this fascinating fight in currencies, where countries are literally trying to battle for inflation and growth using their currencies, which is interesting to watch but nobody knows how it will all end.

“There’s no doubt this uncertainty and volatility will probably continue.

“But the Australian market, which albeit is relatively small and not going to drive global developments, is probably overreacting.”

After a good year for investment banks as the number of completed takeover and equity capital transactions more than doubled, the market jitters are not ideal for companies mulling floats on the stock exchange amid the pre-Christmas window.

While not commenting on UBS’s recent troubled equity raising for Arrium as the iron ore price sank, Mr Grounds said the bank had a long history of delivering for clients through the cycle.

“Whilst the volatility will make some deals harder, we’re still getting deals done as shown by the APN Outdoor IPO last week,” he said.

After a management reshuffle in May, industry speculation has swirled that UBS’s senior guard, including Mr Grounds and Guy Fowler, may be positioning to eventually step back from the business.

But Mr Grounds said his entire senior team were enjoying themselves and positioning the business to grow market share through the volatility as in 2009-10.

A UBS spokeswoman added the bank was on track to a record of 15 years as rated the No 1 investment bank in Australia, according to Dealogic’s assessment of M&A, equity and debt capital markets deals.

“Markets will be interesting, but in our industry I think the strong will get stronger and for us as individuals, these times are intellectually stimulating,” said Mr Grounds.

“While there are a lot of reasons we are in this business, we like the fun and the challenge of it and delivering for our clients.

“If anyone was to ever ask what the secret ingredient to why our business has been successful for such a long period of time it’s basically because we work as a partnership.

“In big large investment banks that can be rare, especially partnerships with longevity through generations. The success of this business is really the function of a lot of people.”

On Thomson Reuters’ data, UBS is leading ECM for the year to date ahead of long-time rivals Goldman Sachs and Macquarie, but the Swiss bank is trailing Goldman in second place in M&A.

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Seven lessons from healthy ‘correction’

James Kirby
991 words
18 Oct 2014
The Australian
AUSTLN
English
© 2014 News Limited. All rights reserved.

What a week. if you were worried about the lack of volatility in the markets, worry no more. We are close enough now to call this market rout “a correction”.
After all, the ASX has dropped roughly 7 per cent since the start of September — officially a correction is 10 per cent, so we might have to brand this a substantial “pullback”.
Thankfully we don’t have margin call mania just yet — nor, for that matter, the doomsayers running amok in the streets. And that’s for the simple reason the market has not overheated to anything like the extent we witnessed in the heady days of 2007. Rather, we are enduring what looks like the nastiest downturn since the market began a long-term recovery in March 2009.
But every correction is different and we can pinpoint seven outstanding lessons we’ve already learnt from this latest market setback.
Wall Street is all that matters We’ve been told endlessly China is the economy that matters to Australia, but it makes little difference when Wall Street takes a turn. This week, we finally had positive news out of China as a raft of infrastructure plans were announced to underpin its 7.5 per cent growth target. But the news was crushed in the rush by traders to follow what was happening on the Dow. Day after day local traders slavishly followed the ticker tape from New York — it will be a long time before this connection is broken.
Don’t underestimate the banks Bank stocks ran too hard midyear and since they represent more than 25 per cent of the ASX 200 they brought the rest of the index down with them. But here’s the thing: the dividend cheques from our big four are tremendously attractive in a low-interest rate environment. As bank stocks started to wane in the past few weeks, their dividend yields began to inch up again. Remarkably by the end of the week, National Australia Bank was yielding 6 per cent ... and that’s before franking. Put $10,000 in NAB term deposits and you’ll get less than 4 per cent. Put the same money in the bank’s shares and you’ll get 6 per cent plus franking, bringing the aftertax benefit to about 7.5 per cent — while these payout ratios remain among the major banks it will provide a floor for their share -prices.
The miners are looking cheap BHP Billiton, the world’s biggest miner, and arch-rival Rio Tinto are selling on low valuations. Indeed Rio is a takeover target for Glencore — and no wonder. It’s a moment in time: commodity ¬prices are near the bottom of the cycle, the “divestment” movement is reaching a climax and China’s national industrial statistics look less convincing than usual. But value investors always return to the top companies: StocksInValue has a conservative valuation of $39 on BHP — it’s trading at about $34.
Retail remains dangerous It was Gerry Harvey’s bad luck that the fund manager regarded as among the best in the world at picking overpriced stocks, Sid Choraria of Singapore-based APS Management, selected Harvey Norman as the most overpriced stock on the ASX 200. It’s not a prize you’d want to win. Harvey Norman’s offshore problems, its “tactical support” of franchises and its peculiar brand of corporate governance all added up to seal its fate. Even at these ¬arguably elevated levels, Harvey Norman shares are now only worth ($3.40) what they were trading at 10 years ago. But the broader malaise is spread through the retail sector, where stocks such as JB Hi-Fi have been hammered in the recent rout. It also suggests turnaround opportunities such as Dick Smith should be left to private equity specialists.
Our supermarket titans may be vulnerable The seemingly unstoppable double juggernaut of Coles and Woolworths will be tested in this more discerning market. In Britain, the duopoly of Sainsburys and Tesco, which has ruled the roost for decades, has crumbled dramatically. In less than a year Tesco is down 50 per cent, while Sainsburys is down 40 per cent. Several specific factors hit the British giants, but what ultimately cut them down was low-cost retailers such as Aldi. This week, Aldi announced it was opening 130 new stories in Australia — that’s what you call taking on the competition. Our supermarkets are now trading at multiples literally twice as high as their British peers — how long can it last?
The RBA has damaged its credibility as a market commentator Why RBA deputy governor Guy Debelle chose the worst week of the year to tell us a “violent” market correction was on the way we may never know. But the oddly timed and highly provocative statement was an irresponsible outburst from the central bank, creating unwanted trauma in the local market midweek. Garrulous deputies are jeopardising the impeccable reputation governor Glenn Stevens once had for worthy, yet diplomatic, commentary.
The Wacky Float Indicator When things are tough, it is notoriously difficult to float on the sharemarket — there are entire periods where the local market is effectively closed to new issues, as nobody is brave enough to back companies that do not have compelling track records. In recent weeks, we have had a string of wacky floats that could only get off the ground in a giddy market. Take Bitcoin Group, which plans to become one of the world’s first bitcoin companies to list anywhere with a $20m float plan on the ASX. On the Wacky Float Indicator that scores 10 out 10.
After any correction the best companies come to light, silly ventures get canned and the sheep as they used to say are separated from the goats. It’s a healthy process, even if it hurts.James Kirby is managing editor of Eureka Report.

News Ltd.

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$1b in new short bets clouds bourse
Vesna Poljak
748 words
1 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

A total of $1 billion in new short bets has undermined confidence in the Austra­lian sharemarket after a promising but volatile start to the fourth quarter.

Short-sellers are betting that share prices will fall towards the end of the year and have targeted consumer discretionary and mining stocks, piling a further $1 billion into short trades ­during October, according to CIMB Securities International (Australia). In addition, three-quarters of companies in the benchmark had short bets added over that period, the broker found.

The trades suggest that short-sellers are growing in their conviction that prices are vulnerable to a fall after the benchmark S&P/ASX 200 Index added 4.4 per cent in October after a torrid September. Stocks closed at 5526.6 points on Friday, up 50 points in the final session for the month.

Global growth has been a concern because the US economic recovery has not been matched by Europe, which will likely mean a drag on demand.

The US Federal Reserve ruled off its $US4 trillion ($4.5 trillion) stimulus program in the past week, after the central bank deemed the United States no longer in need of quantitative easing.

The US still has interest rates set at zero but tightening is the next test for the world's biggest economy. In the meantime, the European Central Bank could begin outright sovereign bond purchases which would bolster risk assets, including equities. But the outlook is defined by uncertainty.

CIMB strategist Andrew Tang said the breadth of short-selling was "striking". He doesn't see the Australian market rally continuing unless global bond yields rise, the US dollar appreciates even more, and Europe's growth outlook strengthens.

"When you see investors put on a lot of short positions in a short period of time, the stock price tends to underperform," Mr Tang said. "Almost three-quarters of stocks actually put on short positions and some are quite significant." Average daily turnover in the top 200 companies is about $4 billion.

Data from the Australian Securities and Investments Commission (ASIC) showed that the stocks as of October 27 that have attracted the most short interest are: Myer Holdings with 16.66 per cent; Metcash (13.46 per cent); Atlas Iron (12.74 per cent); JB Hi-Fi (12.37 per cent); Paladin Energy (11.51 per cent), Cochlear (11.5 per cent); and UGL (10.65 per cent). These figures are based on ASIC's measures of securities reported in short positions as a percentage of shares on issue.

JB Hi-Fi may slide down the pecking order in the next iteration of ASIC's short report because on Wednesday the retailer confirmed in a trading update that it was in a good position in the lead-up to Christmas trading.

JB Hi-Fi's shares shot up 9 per cent on the news as investors evidently were forced to cover their short positions.Turning to analysts

Under CIMB's analysis it is Ten Network Holdings and Fortescue Metals Group that are likely to underperform based on their short positions (5.87 per cent and 9.47 per cent respectively) and new academic findings that prove investors pay more attention to analyst research in uncertain times.

Mr Tang referenced a US study which found that in a 28-year sample of the S&P 500, analyst revisions influenced stock price movements more in times of economic uncertainty and market underperformance.

"Investors tend to pay more attention to changes during uncertain times – that is, during recessions when the market's underperforming," Mr Tang said. "When the market tends to be a ­little bit more predictable, generally investors tend to have their own ideas."

CIMB's year-end ASX 200 forecast is 5600 points. The broker anticipates another year of single-digit earnings growth, which will not foster optimism.

"What [the short positions] show is the market seems fairly unconvinced that the recent rally is sustainable," the strategist said. Between August and October, "shorts didn't actually get covered very much in that period, they've actually gone up".

Banks are attracting short interest too, he added, and short levels have exceeded those recorded during the "taper tantrum" sell-down of 2013.

Mr Tang alluded to the regulatory risk posed by the financial system inquiry and macroprudential intervention as well as the diminishing interest in yield trades as reasons for this.


Fairfax Media Management Pty Limited

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The big comeback

Vesna Poljak
1301 words
8 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Markets Experts shake their heads after fears of a triple-dip recession prove unfounded, writes Vesna Poljak.

Was it all just a "crashette"? Only a month ago, the International Monetary Fund downgraded European growth and a triple-dip recession was being spoken of. Fears spread that the United States Federal Reserve was about to raise interest rates, slamming the brakes on markets.

Bond trading was characterised in one especially fraught session on October 16 as "sheer panic".

Since then, and having averted a 10 per cent correction on the S&P/ASX 200 Index by a fraction of a percentage point, markets have staged a remarkable comeback. Investors are left wondering whether the world is in better shape three weeks after everyone was rushing for cover.

For Anne Anderson, UBS's head of fixed income in the Asia-Pacific region, it was a "crashette". "People were describing it in large parts as being driven by fear," she says.

"You blink and a few weeks later we're sitting here as if it never happened. What was that about? Should I be worried?"

She will be taking some of her cues from the CBOE Volatility Index, better known as the Vix or the "fear index". Fear, and with it a degree of volatility, is back.

"I don't think we're seeing a regime shift in terms of volatility," she says. "You'll see periods of low volatility but you'll get these punctuation marks. It's something to watch, something I'm watching very closely into year-end."

It was quite a punctuation mark. In one month, 9 per cent, or about $150 billion, was wiped off the value of the S&P/ASX 200 Index. In the next three weeks it was back up by 7.5 per cent.

Even the Reserve Bank of Australia has admitted it's a little puzzled at what unleashed the panic. "There has been no obvious trigger for the increase in volatility," it said in its statement on monetary ­policy on Friday.Positive angle

What drove the comeback?

In Australia, the S&P/ASX 200 Index has been lifted by a potent combination of institutional ­buying, a solid earnings season on Wall Street and stabilising economic data from China that suggests the run of weak factory output has troughed. What is still missing is a positive domestic angle.

Local fund managers have witnessed a lot of the most frenetic action coming from offshore.

"The selloff in the domestic market was exacerbated by a couple of domestic ­factors," says Johan Carlberg, a principal of Alphinity Investment ­Management.

"Firstly, we saw foreign investors selling as they tried to pre-empt the fall in the ­Australian dollar. This was always only going to be a short-term reaction, in our view as once the dollar stabilised these investors would be less inclined to reduce their holdings further or would even come back into the Australian market."

Where foreign capital sold, it appears local investors swooped.

A string of heavy filings to the ASX in October show that domestic fund ­managers, including Perpetual, BT Investment Management, Clime Investment Management, Allan Gray and Arnhem Investment Management had topped up or taken new positions in top-200 companies as entry prices fell.

The value opportunity, and profits earned, sets up another contradiction in investor behaviour.

How does one reconcile the buying with net short positions which, according to CIMB, have increased over the past month in the order of $1 billion? That would suggest the shorts are growing in their conviction that prices are destined to fall again.

Some of what has pumped up markets is evidence of the further loosening of ­monetary policy in Japan and Europe, just as the US winds up its quantitative easing ­program which spurred Wall Street to fresh record highs.Surprise from Japan

The Bank of Japan a week ago increased its QE program by up to ¥20 trillion ($200 billion) annually, dictating in a surprise statement that the new target for expansion of the monetary base was ¥80 trillion from ¥60 trillion to ¥70 trillion previously. In spite of this, doubts about the efficacy of Japanese QE remain.

And on Thursday night, the European Central Bank President Mario Draghi kept up his promise to do whatever it takes, signalling sovereign bond purchases were coming. A €1 trillion ($1.45 trillion) increase in the ECB's balance sheet was implied if the region's inflation problems worsen.

Both moves are positive for risk assets and sharemarkets fell into their familiar pattern of rallying on signs of more QE. "Will it work?" asks Anderson of the BoJ's bold policy move.

"Gee, their currency's getting driven lower and then you have Draghi basically reiterating that we'll do what we need to do to help underpin this recovery, but it's still a story of recovering from the crisis and we're seven years in now.

"We can't afford to have rates rise very fast."

She thinks the Fed will wait until the third-quarter of next year before raising interest rates from the zero bound, where they have been for six years.

The speed of Fed's tightening will be ­critical to support markets after that and avoiding repeats of the "crashette", if not a fully-fledged shock.

"What will be very important is, in terms of the pace of which they approach that, whether or not there's financial market volatility around their tightening," she says.

"If there was a sharp selloff in equity markets and bond markets started rallying they would be mindful of that perhaps contributing to derailing the recovery.

"On the other hand, I think they're also mindful if they keep these very low interest rates it's going to create dislocations in other parts of the market. We've already seen a correction in the high-yield market."

The RBA on Friday expressed concerns that Japanese investors buying Australian assets will support a higher Australian dollar than it is comfortable with.

It identifies the US, euro zone and Japanese economies as the biggest sources of market uncertainty, but also Ebola, the exchange rate and Chinese property prices.

"If the flow of data suggests that there is less spare capacity in the US economy than currently envisaged. Interest rates might rise faster than markets expect, with implications for financial markets and exchange rate movements," the central bank said.Regulation on the horizon

Finally, there is another factor for ­Australian investors to come to terms with: bank regulation.

One of the biggest influences on the direction of the sharemarket has been swings in the banks sector and the threat of a heavy-handed outcome from the financial system inquiry led by David Murray. Capital raisings cannot be ruled out as a result.

Macroprudential regulation designed to cool house prices also looms in the ­background.

"We do expect the FSI will lead to banks being required to hold more capital, which will be negative for their return on equity," says Carlberg. "However, the market got ahead of itself in terms of when it will be implemented and how the banks would respond." Some brokers speculated capital raisings would land before Christmas.

The lessons of this extraordinary period are part technical, where positioning and liquidity factors have been at play, and part fundamental.

Fear is still here.

In the case of the Medibank float, where stockbroker bids for the biggest initial public offering left to land this year have totalled $12 billion (they will only get $1.5 billion of the $5.5 billion of stock floated anyway), it is fear of a different kind.

FOMO, or fear of missing out.

150 $ billion wiped off the ASX 200 in a month


Fairfax Media Management Pty Limited

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All roads are leading south for the local sharemarket
THE AUSTRALIAN NOVEMBER 21, 2014 12:00AM

NOTWITHSTANDING the normal Christmas rally in shares and fresh record highs on Wall Street this week it’s hard to see much upside potential for the Australian market while the major sectors remain under pressure. Indeed, it’s hard to see the local market avoiding a test of the October low.

Materials continued to dive yesterday amid a relentless sell-off in iron ore and more disappointing economic data from China; consumer staples suffered from competitive forces in supermarkets; health care slumped on a profit warning from Sonic Healthcare; and banks struggled before the final report of the Financial System Inquiry this month.

Seven Group’s commodity-price-related profit warning this week hasn’t been music to the ears of the mining services sector either.

But iron ore miners are the biggest concern right now. BHP Billiton, Rio Tinto and Fortescue Metals were down 2.7 to 3.7 per cent yesterday after spot iron ore dived 2.2 per cent to a fresh five-year low of $US70.20 and HSBC’s manufacturing PMI fell to a six-month low.

Coming on the back of further weakness in China’s house price data and the biggest rise in non-performing loans since 2005, China’s disappointing manufacturing number suggests Australia’s biggest trading partner and the world’s No 2 economy once again needs further stimulus.

BHP, for one, expects China to keep pulling the policy levers, but the longer-term rhetoric from its annual meeting seemed a bit softer than normal.

While BHP said China and other emerging markets would remain a major driver of global growth, over the medium term it expected China’s economic growth rate to experience a gradual decline as the economy continued to mature — not exactly what growth hungry resources investors want to hear.

BHP’s annual Australian investor day and analyst presentation on Monday probably won’t come up with anything material, given it follows hot on the heels of yesterday’s AGM, but there’s some risk of the world’s biggest miner underwhelming the market.

“As with some of its peers, BHP appears to be doing a good job controlling the controllables,” said JPMorgan analysts, led by Lyndon Fagan.

“However, following significant falls in both iron ore and petroleum prices, we believe the company will find it challenging to present a compelling near-term investment case against a backdrop of an earnings downgrade cycle, a potential rise in net debt, and pressure to conserve capital.”

JPMorgan expects lots of questions from analysts on how to deal with non-core assets after the unsuccessful sale process for Nickel West.

Certainly, investors will be looking for any sweeteners on productivity and free cash flow, amid challenging markets for three of BHP’s “four pillars”.

But perhaps the bigger question is whether the market gets any hope of the capital return — read share buyback — that it has been betting on for the past 12 months. Indeed, the title of JPMorgan’s report was From Capital Management to Capital Preservation.

BHP’s free cash flow won’t cover its dividend in financial 2015, according to JPMorgan, which is likely to see net debt rise to $US27.5 billion ($32.02bn) by year’s end.

“With costs already under scrutiny, capital expenditure is an area which is now firmly under review in order to preserve cash,” Mr Fagan said. “In this environment, we don’t believe a capital management initiative is on the agenda for at least a few years.”

If the market continues to shy off the idea of capital returns and asset sales, BHP may be a bit more vulnerable to the huge falls in commodity prices this year.

Interestingly enough, Macquarie ran the numbers on the mid-cap iron ore space yesterday and concluded the miners are running out of time if the current spot price persists.

“All four mid-cap iron ore producers are not generating free cash flow at current spot prices on our estimates,” Macquarie said.

“If a recovery in prices is not forthcoming, then production cuts or outright suspensions look inevitable.”

But strong cash balances could allow companies such as Atlas Iron, BC Iron, Grange Resources and Mount Gibson to keep producing at a loss for another 1½ to 2½ years, potentially delaying any decision to cut production.

With that in mind, could Chinese iron ore producers also hold on for another year or two, keeping the iron ore price under pressure?

Certainly most analysts who assumed spot iron ore would be supported by the Chinese producers’ marginal cost of production — about $US115 a tonne — have been dead wrong.

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NSW Land Office, regulator like ASIC being looked at for privatisation...

No wonder ASX is getting more exciting... a bankrupt government will appoint clever merchant bankers to look actively into privatisation deals that will bring much need lifeline to repair its fiscal position...

privatisation will mean a leaner private sector going forward and wider range of business activities for investors to take risks and grow their wealth...

bankrupt governments may not be bad for stockmarkets afterall...

NSW Lands Office set for privatisation
• EDITED BY BRIDGET CARTER AND GRETCHEN FRIEMANN
• THE AUSTRALIAN
• NOVEMBER 26, 2014 12:00AM


Privatisation pipeline Source: TheAustralian

THE NSW Lands Office is the latest government department being added to the state’s $30 billion-plus pipeline of assets earmarked for privatisation, with investment bank JPMorgan appointed to embark on a scoping study for the real estate records keeper.
A potential sale of the state government entity has been tipped for some time, but the appointment of an adviser means it is now moving closer to reality.
While a value of the office is ¬unclear, the consensus is that it will sell for hundreds of millions of dollars.
The NSW Lands registry provides access to the state’s property valuation information.
It retains land title records and offers online valuation ¬searches, along with surveying services and support for the survey and spatial industry.
Potential buyers could include companies with strong record-keeping abilities, such as the $6.3bn listed stock transfer services business Computershare.
Potentially, provisions may have to be made by the government to guarantee any costs ¬incurred should errors be made by the department under private ownership.
Any divestment would happen after the state election next year, along with Pillar, the government’s administration provider for superannuation accounts.
But the deals will pale in comparison to the state’s $30bn electricity asset sell-off, which will be one of the largest privatisation deals in history.
At the federal level, the Australian Securities and Investments Commission is slated to be the next major initial public offering ¬behind Medibank, which made its debut as a $5.7bn listed health ¬insurer yesterday.
The deal size would depend on how a sale was structured by the government. Some believe ASIC could be worth as much as $5bn, while others offer a more conservative view on price.
One theory is that a majority stake of ASIC could be retained by the government, with the re¬mainder sold down via an IPO or to a pension fund such as the ¬Future Fund or Borealis, which ¬already part-owns a Canadian equivalent to ASIC. It is understood that Canadian pension fund Borealis has recently been assessing the asset, weighing up a potential future acquisition.

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Stocks savaged in $30bn wipeout
DAVID ROGERS THE AUSTRALIAN DECEMBER 02, 2014 12:00AM

•••
THE Australian sharemarket is expected to have a tough time clawing back from yesterday’s $30 billion rout, with analysts expecting protracted weakness in commodity prices, putting the ­resources sector under pressure.

Yesterday’s 2 per cent fall in the S&P/ASX 200 was its biggest one-day decline in seven weeks, yet the market’s two-day fall of 3.6 per cent was its worst in more than two years.

Australian shares continue to underperform offshore markets this year, as the dollar adjusts to lower commodity prices and the increasing chance of another interest rate cut.

The S&P/ASX 200 is down more than 2 per cent this year versus a 5.2 per cent rise in the Morgan Stanley Capital International World index and a 14 per cent rise in the US’s S&P 500.

“Last month, every major Australian sector underperformed their global counterparts, so the problem seems to go beyond simply the resources stocks weighing us down,” UBS Equities Strategist Dean Dusanic said. “It does appear that there has been a generalised sell-off of Australian equities, so it may be indicative of an asset allocation shift out of Australia.”

Reflecting a flow of money offshore, the dollar has fallen 11 per cent since June. Yesterday, the exchange rate hit a four-year low of US84.17c.

More disappointment with China’s economy added to the gloom, as two gauges of factory activity indicated manufacturing had lost momentum despite a recent cut in interest rates.

China’s official measure of manufacturing activity slipped to its lowest showing since March, while a private gauge compiled by HSBC and research firm Markit touched a six-month low, according to data released yesterday.

“The PMI data suggests that fundamentals are still very weak,” Macquarie Group economist Larry Hu said. “Investment in property and manufacturing remains weak, so the government is the only one spending. And when government spending wanes in the winter months, the economy falls off,” in part due to cold weather affecting construction projects.

“The rate cut probably isn’t enough,” said HSBC economist Julia Wang of the surprise cut by the Chinese central bank last month. “We think there will be more easing needed given the economic situation.”

The sustained sell-off in the sharemarket since Thursday is primarily due to a 13 per cent plunge in oil prices after OPEC failed to agree on production cuts, but there’s a growing risk of other commodities following oil and iron ore.

That was evident in BHP Billi­ton’s share price yesterday as it fell below $30 for the first time in five years. BHP closed down 5.3 per cent at $29.27.

“There was an obvious capitulation of bulls on BHP and there could be more to come,” said Morgan Stanley wealth management investment adviser Shannon Briggs.

Although less than 25 per cent of BHP’s earnings comes from oil, BHP’s share price chart is starting to look eerily like the oil price, and that may be because other commodities are starting to correlate with oil.

Analysts are increasingly expecting crude oil to test its global financial crisis low of $US40 a barrel, and while few expect BHP to fall much further, its equivalent low was $20 a share.

Elsewhere, Santos looks likely to be hardest hit if oil prices stay low for more than 18 months.

UBS warned that there were increasing risks of Santos selling assets — at the wrong time of the cycle — or undertaking a dilutive capital raising if its investment-grade credit rating came under pressure.

“We expect further oil price volatility; it’s hard to pick the bottom, but we could be in for a period of sustained low prices,” UBS energy analyst Nik Burns said.

One bright spot remains transport companies, which continued to benefit from lower oil prices. Qantas closed up 4.7 per cent.

Elsewhere in the region, Japan’s Nikkei 225 rose 0.8 per cent yesterday after a 6.4 per cent rise last month.

China’s Shanghai Composite was flat after rising 11 per cent last month. But Hong Kong was down 2.6 per cent.

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Resilience belies ailing economy’s prospects
DAVID ROGERS THE AUSTRALIAN DECEMBER 05, 2014 12:00AM

In a remarkable display of resilience to the risks from sustained weakness in commodity prices and anaemic economic growth, the Australian sharemarket staged its strongest three-day rise in 12 months, yet it’s hard to believe the market is fully accounting for the prospect of disappointing returns from the resources sector and the rising risk of recession in Australia.

After falling a whopping 3.6 per cent in the two days following OPEC’s decision to maintain production last week, the benchmark S&P/ASX 200 recovered 3.1 per cent, helped by stronger offshore markets, a lower dollar and growing expectations of domestic interest rate cuts.

Westpac chief economist Bill Evans was the latest forecaster to predict interest rate cuts.

“We still expect rates to be on the rise in 2016 as the world economy gathers considerable momentum but we now expect the RBA to cut rates further in the early months of 2015 in an effort to bolster domestic demand and lower the dollar before evidence around the world economy becomes clearer around the middle of the year,” Mr Evans said.

Weakness in the national accounts — including falling inflation, contracting national incomes and a loss in growth momentum — coupled with further sharp falls in commodity prices, continued weakness in consumer sentiment, which has failed to recover from its post-budget fall, and the prospect of a further significant negative shock to confidence would be enough to prompt the RBA to use some of their remaining policy “scope” and lower rates further, Mr Evans added.

Westpac, Goldman Sachs, Deutsche Bank, Credit Suisse and Saxo Bank are among institutions now forecasting more rate cuts in Australia and the money market is fully pricing in a cut by mid-2015.

The change in expectations of rate hikes to rate cuts next year accelerated at a dramatic pace after GDP data this week missed expectations by the most since 2009, with the quarterly rate falling to 0.3 per cent, versus the expected 0.7 per cent.

Overnight indexed swaps for June plunged to 2.15 per cent, implying almost 50 basis points of easing by that date. The OIS curve was also fully discounting a 25-basis-point rate cut by February.

For investors faced with the prospect of sustained low nominal interest rates and potentially negative real returns from bank deposits and bonds, it’s hard to avoid owning blue chip shares that offer attractive dividend yields.

Banks are rising on this basis, with Westpac up 3.5 per cent in the past three days. But while it may be fair to assume that Joe Hockey won’t want to harshly penalise the banks by enforcing any tough new capital requirements from the Murray inquiry — action that could limit their ability to keep interest rates down — the market could be nervous on that score.

It should also be remembered that commodity prices have plunged since the weak third-quarter GDP data, so there’s a risk of the economic data deteriorating further.

Bulls assume the housing market is rock solid, but if business confidence starts to suffer, unemployment may push higher.

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Pundits bullish about ASX in 2015 despite recent turbulence
PRASHANT MEHRA THE AUSTRALIAN DECEMBER 13, 2014 12:00AM

Stock index forecasts for next year.Stock index forecasts for next year. Source: TheAustralian < PrevNext >
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A SHARP drop in equity markets over the past few months amid tumbling commodities and energy prices has seemingly failed to dampen investor sentiment, with market experts turning bullish in forecasts for the S&P/ASX 200 index next year.

Australia’s leading share index could touch 5875 points by the end of 2015 — a 12 per cent rise from Thursday’s close of 5231 points, according to the average estimates of a poll of 10 market strategists and analysts this week. Estimates for the poll ranged from a low of 5460 to as high as 6130 points.

“We will see gains in the share market next year, at the same time we should also see a lot more volatility as economic growth will be slightly disappointing,” said Peter Quinton, head of research at Bell Potter Securities.

Australia’s economy grew at a lower-than-average 2.7 per cent in the year to September and growth is expected to stay around the same level in 2015. The Reserve Bank has held its main lending rate steady at 2.5 per cent for 16 consecutive months but is now facing increasing calls for a rate cut to bolster growth.

The benchmark index hit a high of 5679.50 in early September, and was on track to match previous forecasts for ending 2014 around 5750 points, but skidded sharply in the weeks since as iron ore prices went into a free fall and crude oil prices hit a five-year low of $US68 a barrel.

Many analysts believe the market is now in ‘‘oversold’’ territory and a gradual rebound is likely in the new year as local and foreign investors continue to chase higher returns in a low interest rate environment, and a recovery in the US economy bolsters global economic sentiment.

“We will see the market valuations go up a bit,” UBS strategist Dean Dusanic said.

“The market is currently trading at a price-to-earnings ratio of around 13.7 times after the recent decline, compared to a longer-term average of 14.5 times.”

That leaves enough room for a potential run-up in stocks, which combined with an average dividend yield of 6.9 per cent, could attract return-hungry investors.

The Australian equity market has seen strong inflows in the past few years, led by a fast-growing superannuation savings pool that has taken advantage of sustained domestic economic growth and low interest rates to channel investments into stocks.

Self-managed super funds, which now control a third of the country’s retirement savings pool, are alone expected to put in an average of $1 billion a month into equities, Credit Suisse analyst Hasan Tevfik said last week.

Analysts are tipping gains across sectors such as retail, media, financials and telecoms as investors focus on companies that will benefit from an improvement in consumer spending in case rate cuts come through.

“Consumer spending has been conservative so far but there are some signs that consumers are emerging from their shell. We are waiting for that to turn into a ­virtuous cycle,” said Michael ­McCarthy, chief market strategist at brokerage CMC Markets.

However, the worsening economic climate in Japan and Europe, an unexpected rise in the Australian dollar and a further sharp fall in commodity and oil prices were flagged as major risk factors that could prevent a recovery in the equity market next year. For mid-2015, the poll gave a median forecast of 5620 points for the benchmark index.