ASX CLOSE: Markets closes on session high

Friday 6th November 2009

In Asia, regional equity markets are all in the black this Friday following a strong set of leads from the US and a positive GDP growth update from the Reserve Bank of Australia. The Hang Seng is the best performer, currently up 1.6% while the Kospi, Nikkei 225 and Shanghai Composite are up 1%, 0.6% and 0.6% respectively.

In Australia, the ASX 200 closed up 1.9% at 4594, on the highs for the session. Cyclical sectors leveraged to the global economic recovery added the most points, in particular the toll road / infrastructure plays after Transurban's takeover bid from two Canadian pension funds.

Strength during the afternoon session dispelled earlier concerns of a classic Friday afternoon fadeout with investors pushing stocks to session highs. Despite today's strength, investors still don't seem convinced that we've seen the bottom of this current pullback, with volumes still subdued.

While the market finished convincingly higher today, the fact that it hasn't been able to string together consecutive up days indicates sentiment is still fragile. Rather than investors using rallies to get short or offload stock, we'd like to see follow-through buying on strong volume as well as evidence that some of the giant piles of sidelined cash are beginning to be put to work in stocks that have pulled back significantly.

With plenty of local and regional economic data due out next week, including the important monthly Chinese numbers, its not surprising investors are still a little gun-shy in opening new long positions.

Turning our attention to the market and it was the cyclical sectors that drove the ASX higher today. The materials (2.5%), industrials (2.4%), financials (2.2%) and energy (1.6%) sectors were the biggest contributors.

In the materials space, it was Alumina and the diversified miners that led the sector higher. Alumina rose 4.6% while the likes of Rio Tinto, Fortescue Metals Group and BHP Billiton were all up between 2.6% and 3.9%.

There were a few broker notes out on Rio Tinto today. Citigroup believes Rio Tinto's improving position is making the planned iron ore JV with BHP Billiton look less attractive. The broker said "with the balance sheet stress removed and growth back on the agenda, selling down an interest in the highest returning/growth division is looking less attractive despite the US$10 billion plus synergies on offer. An adjusted equalization payment of about US$4.8 billion to Rio from BHP looks fair on our assumptions but less favourable when higher growth scenarios are applied. Any decision by BHP Billiton to revive a full bid for Rio would be unlikely until the outcome of the JV is clarified. European Commission approval of the JV remains a major stumbling block. A spin off of Robe, IOC and Samarco to create a new 80 million tons per year producer could help win approval".

Also, Deutsche Bank lifted its target price for the diversified miner to $73.50 from $69.50 on iron ore and copper expansions. It said "it boosted its valuation for Rio Tinto after including the plans to expand iron ore output in the Pilbara to 330 million metric tons a year, Oyu Tolgoi project in Mongolia and La Granja in Peru. Rio Tinto's gearing has dropped to 33% and is set to fall to 22% in 2010 and that growth has recommenced. If the Cloud Peak IPO and iron ore JV were to complete, this would bring the total additional cash inflow to about US$10 billion on our estimates, which could drop gearing to low single digits. Rio Tinto's increase in capex guidance for 2010 is just the beginning of a new growth phase".

Elsewhere, Royal Bank of Scotland upgraded Orica to ‘hold' from ‘sell' and upped its target to $21.50 from $15.00 ahead of Monday's FY result. It said "FY09 results should reflect Orica's high quality strategic position in its markets and nimble management. This should continue to see the shares enjoy support but with growth expected to pause in FY10. However, Royal Bank of Scotland has concerns about the near-term ammonium nitrate market. Forecasts FY adjusted net profit of A$615 million, up 7.5% on FY08's A$572.3 million, with earnings growth skewed to 1H because of lower 2H ammonium nitrate volumes".

In the industrials sector, Connect East (6.3%), Transurban (5.9%), Leighton Holdings (5.9%) and Macquarie Infrastructure Group (5.8%) were the standout performers after the takeover offer for Transurban yesterday spurred renewed interest in the space.

Interestingly, Macquarie Group today upgraded Leighton Holdings to ‘outperform' with a price target of $41.78. This follows the recent pullback in its share price and the increasingly positive outlook for Leighton Holdings. Macquarie Group sees the key drivers as being bulk commodities demand from China, oil and gas opportunities and government related infrastructure projects. Also, Royal Bank of Scotland lowered its target price for Leighton Holdings to $33.00 from $34.00 after it adjusted its sales and profit forecasts following the AGM. It said "the growth outlook is encouraging, with global government stimulus packages boosting infrastructure spend, but mixed results for 1Q reaffirm our view that FY10 will remain challenging. Leighton's growth outlook was positive over the long term, while acknowledging near-term activities were down in several key markets such as the Middle East. Despite this, Leighton believes it will continue to benefit from the government stimulus packages around the globe, helping to offset declines, as well as a global backlog of infrastructure needs".

Elsewhere, following a strong night among US financials on the back of positive comments from highly regarded banking analyst Dick Bove the Australian financials had a very strong session. Axa was the best percentage gainer, rising 5.4% while QBE Insurance Group and Macquarie Group rose 4.3% and 4.1%. The big four banks all finished in the black, up between 1.5% and 2.6%, with Westpac Banking Corporation the strongest.

Prices are in AUD unless otherwise stated.
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