ASX CLOSE: ASX down 1.3%

Friday 20th November 2009

Across Asia, regional markets were mostly lower this Friday, down for the fourth straight session and the longest losing streak since July. Markets are being weighed down by very weak leads from the US and concerns stemming from Sony Corporation pushing back its profitability targets. The Nikkei 225 is the worst performer, down 1% while the Hang Seng and Shanghai Composite are down 0.5%, 0.2%, respectively. The Kospi is up 0.2%.

In Australia, the ASX 200 was down 1.3% at 4685.80 on broad based weakness with all the sectors finishing in the red. The financials, materials, consumer discretionary and industrials detracted the bulk of the points, basically mirroring the leads we saw from US markets. On top of that and given that it is a Friday, there isn't a whole lot of interest or volume in the market. It looks like a lot of fund manager's and traders have packed up shop for the weekend.

Weakness seen in recent days has the hallmark characteristics of a healthy pullback. The uptrend is still well and truly intact so we don't see it as a negative. However, in the short term bullish sentiment has probably got a bit too far ahead of where the market is. However, the majority of participants are still bullish into Christmas, with money expected to continue to flow into materials stocks at the expense of financials.

The last few days' trade has had no order to it, however today we've seen consumer staples and other typically defensive sector bid higher, indicating investors are positioning themselves more defensively and possibly for more downside.

No one really knows where the next catalyst might come from and when. The market is simply drifting along, with little to no interest.

Looking across the market, all sectors finished in the red. The consumer discretionary, financials, industrials and materials detracted the lion's share of points.

The consumer discretionary sector was down 1.6%, with Aristocrat Leisure the biggest decliner, falling 6.6%. Elsewhere, the likes of Fairfax Media, Harvey Norman, West Australian News and Tabcorp Holdings were all down between 1.9% and 2.6%.

Interestingly, JPMorgan upped Seek's price target to $6.92 from $6.11 on an increase in EPS forecasts based on the online advertising site's new dimensional reporting system. The broker said "for employment classifieds, 1H should continue to see declining volumes but 2H should experience growth against depressed levels of a year before".

Among industrials, Brambles (-3.6%), Leighton Holding (-2.4%), Downer EDI (-2.6%) and Toll Holdings (-2.3%) were the major decliners.

Alumina, BHP Billiton, Rio Tinto and Fortescue Metals Group did the most damage in the materials sector after base metals were sold off on the back of US dollar strength overnight. They were all down between 1.9% and 2.4%, with Alumina the worst performer.

There has been some talk recently about the iron ore joint venture with Rio Tinto and BHP Billiton. JPMorgan believes the estimate of $10 billion worth of synergies from the joint venture looks conservative, with the figure possible as high as US$13.9 billion. JPMorgan estimates the pretax synergies would be more than US$1 billion per year by the fifth year and could be as high as US$2 billion if you f actor in the companies' expansion plans. JPMorgan said "we see the Pilbara Iron Ore JV as creating a valuation uplift for both companies. It rates BHP an ‘underweight' with a $40.85 target and Rio at ‘neutral' with $72.60 target.

Still in the sector and Sims Metal announced this morning that it will be raising $400m in an underwritten institutional placement and $75m through a retail share purchase plan. At first glance, this looks positive for the group. The fact that underwriters are prepared to offer this at a small discount of 5.4% suggests confidence. Also, the outlook for hot rolled coil and iron ore prices should add further support. Sims has indicated they will look to use the funds to grow the business, with some expectations of future M&A activity. With an excellent management team, strong balance sheet and significant growth potential, this could be the catalyst needed to entice fresh money back into the stock, especially given recent sideways trade.

Following a significant sell off among US banks, Australian financials followed them south with the sector declining 1.5%. Insurance Australia Group was the worst performer, falling 6.9% while the big four banks all detracted points. ANZ was the worst performer, down 2.3% while Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation were all down between 0.6% and 1.9%.

Insurance Australia Group fell strongly today after QBE Insurance Group poured cold water on the prospect of a second bid. In an interview with CNBC, QBE Insurance Group CFO Neil Drabsch said "in the current conditions, however you do your sums, you'll find that the returns to QBE by putting together the two companies, at any premium, would only give very modest earnings per share, with little prospect Insurance Australia Group would meet its 20% return on equity target". However, prospects for acquisitions continue to look stronger in the U.S. and Europe in particular.

Prices are in AUD unless otherwise stated.
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