Material sector boosts ASX

Wednesday 11th November 2009

Across Asia, regional markets are mixed after Japanese machine orders jumped more-than-expected and Chinese data showed that retail sales and industrial production had accelerated.

The Hang Seng is the best performer, currently higher by 0.7% while the Kospi is up 0.4%. On the downside, the Shanghai Composite is lower by 0.4% and the Nikkei 225 is flat.

In Australia, the ASX 200 was up 0.5% at 4757, with the materials sector adding the bulk of the points on the back of EPS upgrades for Rio Tinto and BHP Billiton and the stronger-than-expected numbers from China.

Today’s market strength was impressive given the flat overnight leads and the market’s significant run-up in recent sessions.

The materials sector is beginning to reassert its market dominance as brokers begin to upgrade commodity price forecasts, in turn driving upward EPS revisions.

Further supporting the big miners has been a rally in dry bulk freight, the first pickup in spot iron prices since October and continued evidence of strong growth from the Chinese economy.

The numbers we’re seeing out of China continue to point towards inherent strength in its economy. It certainly looks like these Asian developing economies will continue to recover faster than other regions. This should underpin the insatiable appetite for riskier assets, supporting further strength in the AUD and potentially triggering another leg down for the US dollar.

However, one point of caution was a sharp pullback in new Yuan loans suggesting a possible slowdown in coming months.

This saw a knee-jerk reaction to the downside in both the AUD and NZD before they quickly recovered to pre-announcement levels.

In economic news, Australian consumer sentiment as measured by the Westpac survey slipped in November, impacted by the RBA’s back-to-back rate rises. Sentiment slipped 2.5% from October to 118.3 but the average reading for the past three months was 119.7, a level which has only been surpassed four times in previous decades.

Westpac chief economist Bill Evans said “shopper strength won't hold up forever. Our survey will indicate to the (Reserve) Bank that we have probably now reached the point in the rate hike cycle when households will become increasingly sensitive to higher rates”.

Turning our attention to the market and the property trust sector was the standout performer, rising 4.2% after the Investa IPO was cancelled due to a lack of confidence in the commercial property sector and the recent weakness of the Myer float. Mirvac and Stockland Group were two of the biggest percentage gainers, rising 6.8% and 6.3% respectively while Westfield Group added 3.5%. The materials sector had a strong day, rising 1% with the likes of Rio Tinto, BHP Billiton, Alumina and Fortescue Metals Group all adding between 1% and 1.7%, with Rio Tinto the top performer. Following much discussion, Credit Suisse was today the first broker to upgrade EPS forecasts for both Rio Tinto and BHP Billiton after raising its commodity price assumptions. The broker said “it had lifted its 2010 iron ore price by 15%, hard coking coal by 23%, nickel by 23%, zinc by 36% and oil by 17%. As a result of changes, it upped BHP Billiton’s earnings forecast by 19% in FY10, 28% in FY11 and 31% in FY12.

BHP Billiton’s target was upped to $45 from $42 with its ‘neutral’ rating maintained. Rio Tinto earnings were upped by 19.5% for 2009, 23.5% for 2010 and 3% for 2011, with its target price upped to $75 from $68 and ‘neutral’ rating maintained.

The easy money has been made in mining stocks with increased risk appetite among investors seeing stocks outperforming commodities”.

Elsewhere, Royal Bank of Scotland cut New Hope Corporation’s target price to $4.72 from $5.51 after the miner paid a special dividend of 73 cents. It maintains its ‘hold’ recommendation and said “New Hope is a deep value play but is less leveraged to a turnaround in thermal coal prices than peers Whitehaven and Centennial.

We are also cognisant of a possible lack of near-term catalysts to push it higher following its strong sector outperformance through FY09 and its re-rating ahead of the special dividend”.

The consumer discretionary stocks had a good session with the sector adding 0.7%. Fairfax Media, News Corporation and WA News were the best performers, finishing higher by 2.5%, 2.1% and 1.6%, respectively.

Interestingly, Deutsche Bank lifted its price target to $1.40 from $1.05 but retained its ‘sell’ rating.

It said “Fairfax Media management have reported improvements in advertising market trends, consistent with the early stages of a cyclical recovery. However, we remain concerned that the market has already priced in a large portion of the expected earnings recovery that is by no means a foregone conclusion given the uncertain macro environment and the unresolved structural challenges”.

It was a mixed day for the financials, although the sector as a whole managed to add 0.4%. Macquarie Group was the biggest decliner, down 2.6% while both Commonwealth Bank of Australia and Westpac Banking Corporation finished in the red, down 1% and 0.5%. On the upside, QBE Insurance Group and ANZ rose 1% and 0.7%.

Prices are in AUD unless otherwise stated.
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