ASX CLOSE: Materials section pushes market higher

Monday 23rd November 2009

In Asia, equity markets are mixed today as stronger metal prices boost mining stocks and Korea Exchange Bank rose on speculation it will get a takeover offer. The Hang Seng was the biggest gainer, up 0.5% while the Shanghai Composite is 0.4% higher and the Kospi is down 0.3%. Japan is closed for a public holiday.

In Australia, the ASX 200 finished 0.7% higher at 4717 after earlier trading up to 4725.40. As we saw last week, the materials sector added most of the gains today as funds continued to flow out of high priced banks and into the big miners. Over the next six weeks, nearly all market professionals believe the materials sector will outperform.

However, the key for us will be how much of a drag the financials are? If they underperform on a relative basis then the market has a good chance of moving higher into Christmas. However, if they are weaker-than-expected and post absolute losses, then it'll be harder for the market to rise as whole due to their 39% weighting.

Gold has blown its top once again in Asian trade, setting a fresh all-time high of US$1064.79 per ounce. Following early morning gains, the momentum funds moved in and are driving it higher, capitalising on low liquidity levels ahead of European trade.

The market managed to shrug off Friday night's falls in the US which was a very positive sign. The market probably got a little oversold towards the end of last week so we saw some of that lost ground regained.

However, offshore leads are still going to be very important. It could prove a rocky week in the US as volumes dry up ahead of Thursday's Thanksgiving Day holiday and economic data shows that, while recovering steadily certain sectors of the economy are still relatively fragile.

The market still hasn't seen evidence of a pickup in consumer spending, which accounts for two-thirds of US GDP. This coming Friday is commonly known as ‘Black Friday' and traditionally signals the start of the holiday shopping season as retailers slash prices to tempt shoppers. This usually sets the tone for the remainder of the holiday period and will give the market a crucial insight into the health of the consumer.

Turning our attention to the market and it was again led by the materials sector, rising 1.7%. Friday's base metal price leads were relatively uninspiring but gains in Asian trade ignited the sector. The big gold miners led the way with Lihir Gold and Newcrest Mining rising 3.4% and 3.2% as gold pushed to new record highs. Elsewhere, Rio Tinto was up 3.6% while Alumina and BHP Billiton rose 2.7% and 1.1%.

Base metals remain supported by a host of supply side disruptions. Unions in Chile are threatening to halt output at mines owned by BHP Billiton, in a show of solidarity with Spence copper miners, where strike now lasting about 40 days. London Metals Exchange aluminium is reacting to potential power price increases in China while zinc is reacting to a potential fall in concentrate supply with MMG's Century zinc mine ceasing shipments because of damage to zinc concentrate pipeline.

Interestingly, Credit Suisse said "BHP Billiton is unlikely to launch a fresh takeover offer for rival Rio Tinto. The planned iron ore JV with Rio should capture many of the synergy benefits that a full bid would bring. Also, if the JV is rejected by regulators then a full bid for Rio would also fail at the regulatory hurdle. A deal pitched at a 30% premium, or 2.3 BHP shares per Rio share, would be materially dilutive of EPS and would reduce BHP's return on equity to 12% from 25%; shareholders would be unlikely to support a deal as a result. We see a reinstatement of the buyback as a more preferable option for BHP shareholders than another tilt at Rio. BHP Billiton is now its preferred pick of the two diversified miners after strong share price appreciation by Rio in recent months.

Elsewhere, the industrials sector added significant points, rising 1.2% with the likes of Leighton Holding, Macquarie Infrastructure Group and Asciano all gaining between 1.9% and 2.3%. James Hardie had a solid day too, finishing the session up 6.5% after announcing Q2 results this morning.

Paterson's raised James Hardie's FY earnings forecast to US$109 million, in line with company's guidance of top end of range between US$77 million and US$115 million. James Hardie posted a 2Q operating net profit of US$37.6 million, ahead of Paterson's forecast of US$22.7 million, which was underpinned by a US EBIT margin of 28.5%. It said "While the company has produced an exceptionally strong interim half, it remains very cautious given the still weak US economic conditions and upcoming northern hemisphere winter". They retain their ‘sell' recommendation.

The retailers drove solid gains in the consumer discretionary sector (0.7%) with Harvey Norman and JB HiFi leading the way. They were up 5.2% and 3.6% respectively after Gerry Harvey yesterday said Christmas sales are going to be a record high.

On the downside, the financials finished 0.1% weaker as investors continued to rotate out of banks and towards more cyclically leveraged stocks like the miners. National Australia Bank was the main detractor, down 1%.

Prices are in AUD unless otherwise stated.
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