ASX Close: Materials sector a standout performer

Wednesday 7th October 2009

Across Asia, equity markets were in a good mood today following a very strong set of overnight leads. Strength came from mining stocks and banks as gold surged to a record high overnight and Sumitomo Mitsui Financial Group was upgraded by a number of brokerage firms. The Hang Seng is currently up 1.8% while the Nikkei 225 and Kospi finished 1.2% and 0.5% higher.

In Australia, the ASX 200 finished 2.3% at 4695.7 having briefly traded above 4700 before the close. The bulk of the points came from the materials space as investors realised that yesterday's rate hike was a ‘vote of confidence' in the strength of the domestic economy and our biggest Asian trading partners.

While the Australian markets' initial reaction to the RBA's decision to raise rates was a mild sell-off, perhaps fearing the central bank may turn the screws too tightly, it has taken quite a bit of comfort from the global reaction which seemed to rejoice in the fact that a first world, developed nation was actually tracking well enough to not only consider rate hikes but actually pull the trigger.

Australia's commodity based economy and the ASX 200's subsequent heavy weighting toward the miners has really given the market an extra boost today. In fact, it looks like the materials sector is beginning to retake leadership of the market.

With the last three or four months of gains driven by the financials sector, the materials sector is now looking to resume its leadership role as a declining US dollar has seen money flow back into commodities. In just the last month, the financials sector was up 9% vs a rise of only 3.1% for the materials. However, in the last 5 days, the materials sector has shot to the fore, up 1.1% vs a fall of 1.8% for the financials.

Following Friday's large selloff, expectations within the bear camp were buoyant. However, a quick rate rise heightened expectations for a global recovery, with the bears quickly returning to their dens. A long and cold hibernation looks more and more likely as calls for an imminent correction diminish once again.

In economic news, Australian housing finance fell 0.6% in August from 2.2% fall in July, slightly worse than economist's forecasts. As expected, a pullback in Australian housing finance appears to be underway as the gradual decline in government stimulus and higher mortgage rates dampen activity.

As a result of a continuing decline in the USD overnight, the materials sector was the standout performer on the Australian market today, posting gains of 3.9% and contributing 41 points to the ASX 200's advance. Heavy weight miners BHP and Rio Tinto led the way finishing higher by 3.2% and 5.2% respectively, while Fortescue Metals, which had been under heavy selling pressure in recent days, surged 9.1% benefitting from upgrades to iron ore price targets from Goldman Sachs.

Australia's gold miners also surged with Newcrest Mining up 6.7% and Lihir Gold 5.7% after gold hit an all-time high of US$1043.55 overnight. It easily accounted for the previous March 2008 (US$1033.00) high with brokers now calling US$1100 as the next target, helped by short covering. The main driver for gold was a story out of the UK that indicated China, Russia and the Middle East states were planning to switch to an alternative currency other than US dollars for oil trading. Even after denials, gold continues to be very well supported at US$1039.60.

Following solid overnight leads, the financials sector added significant points today, rising 2.7% and contributing 51 points or 49% of the day's total gain. Suncorp-Metway was the biggest percentage riser, up 6.9% while Macquarie Group jumped 5.8%. The big four banks added their fair share of the points, rising between 1.3% and 3.7%, with Commonwealth Bank of Australia the best performer.

Citigroup upped its price target for Suncorp-Metway to $9 from $7.50 and maintained its ‘hold' rating. It said "the target price rise is on stronger-than-expected equity markets, ongoing improvements in the economy, bank peer group trading at higher multiples and increased risk appetite".

The energy sector was also very well bid, up 1.5% with Paladin Energy (5.7%) and WorleyParsons (5.6%) leading the way.

Elsewhere in the market, Royal Bank of Scotland reiterated its ‘buy' rating and $8.25 target price for Brambles (-5.5%) saying "its commitment to increased pallet repair spending and segmented pallet offering in US, coupled with increased sales force, is a positive restructure for the long-term. It also believes replacement of Mike Ihlein with CHEP's Europe head of last 20 months Tom Gorman as CEO is also good news. Although not a long-time CHEP veteran, we think this move will be taken positively, given Gorman's solid performance at CHEP EMEA".

Also, there were a number of broker reports on James Hardie (-0.4%) released today with Citigroup upgrading it to a ‘buy' from ‘hold' while JPMorgan remained ‘underweight'. Citigroup said "Even though our U.S. housing view is no more positive than consensus, we like what we saw at JHX, hence the upgrade. We were impressed by the research and development capability, and believe JHX has made important progress in penetrating the renovation and repair market". However, JPMorgan had a different view, saying "While we are attracted by James Hardie's growth potential, we fail to see valuation support. We view this as expensive given the uncertainties around the outlook".

Prices are in AUD unless otherwise stated.
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