16/02/10 - 15:30
Ben Potter - Research Analyst, IG Markets
Afternoon thoughts from the Trading Room – 3.30pm
In Asia, the Kospi is the best performer, up 0.8%, while the Nikkei 225 is 0.3% higher. This is the fifth gain in six sessions for Asian markets, driven by strong financial and materials leads from London.
Locally, the Australia 200 CFD Index is 0.8% firmer at 4583.2, slightly off earlier highs of 4598. Solid leads from London got the ball rolling, but it was the sharply better-than-expected trading update from Westpac Banking Corporation, featuring a large reduction in impairment charges, that boosted market sentiment.
This buoyed the whole sector, with financials adding the bulk of the points. Consumer discretionary, industrial and materials sectors are also contributing significant points.
However, there’s some profit taking creeping in, especially among the materials names. This has been the theme of late, with few CFD traders convinced of the sustainability of any rally.
Westpac’s update this morning caught the market off guard, with many analysts seeing few potential catalysts for share price outperformance. Higher profits and reduced bad debts are likely to see significant broker upgrades, resulting in sector re-weightings and a potential switch of preferences amongst the big four.
It’s worth noting today, that we’re seeing Commonwealth (which has been a clear outperformer in recent months) underperform significantly, possibly a sign that switching has already begun.
Today may be a precursor to what we can expect to see when clarity over the current macro issues improves. Valuations and fundamentals should again become the key drivers of stock performance.
Market Update from the Trading Room – 1.00pm
Australia 200 CFD Index: 4597 (1.1%)
| Top 3 Sectors | Bottom 3 Sectors | |||
|---|---|---|---|---|
| Financials | 2.0% | Healthcare | -1.0% | |
| Materials | 1.0% | Telecommunications | -1.0% | |
| Consumer Discretionary | 0.6% | Information Technology | -0.2% |
| Advancers (Index Points) | Decliners (Index Points) | |||
|---|---|---|---|---|
| Westpac Banking Corporation | 16.1 | Telstra | -1.4 | |
| ANZ | 9.5 | Primary Health Care | -1.2 | |
| National Australia Bank | 7.7 | Fosters Group | -1.2 |
Foster's Group - At first glance, there appears to be little fizz to Foster’s result after the global beverages company missed profit expectations by 6.8%. Profit came in at $355 million, down 13.5% on year and falling short of the average consensus estimate of $381 million. Also, its dividend did not meet some analysts’ expectations. It’s a tale of two businesses – the beer side has been relatively resilient with CUB’s EBIT up 6.6% from a year ago. However, once again the global wine business has weighed heavily with oversupply and the adverse Aussie dollar movement impacting dramatically on wine’s EBIT. Also, the lack of a meaningful outlook may add further pressure to the group’s share price.
Transurban – Shares have hit a 3-month low this morning, as doubts grow about the chances of a revised bid from Canadian Pension Plan Investment Board (CPPIB) and Ontario Pension Plan (OTPP). In early November, Transurban rejected a highly conditional and non-binding joint proposal from CPPIB and OTPP.
Mirvac Group – There are signs that Mirvac is emerging from the problems of the last few years, after it swung to a first-half net profit of $47.2 million. The result is up from a $645.7 million net loss the year earlier, an indication write downs have peaked as the pace of downward revaluations slow. Underlying earnings rose 59% to $129.4 million, ahead of the $116.4 million average of five analysts' forecasts compiled by Dow Jones Newswires. Higher-than-expected earnings will increase investor confidence that Mirvac will meet or beat its FY EPS guidance of 9.2 cents. The company is positive on the prospects for the residential development market, saying investors, second and third home buyers appear to be filling gap left by first home buyers.
Westpac Banking Corporation – Australia’s second biggest bank is up more than 5% this morning after saying its 1Q cash profit rose 33% on year to $1.6 billion as charges for bad loans (particularly in its institutional bank) fell away a lot quicker than many may have expected. Its impairment charge fell to around $400 million for the quarter, half the amount booked for the same quarter a year ago, with expectations that it will be lower as the year progresses. With earnings growth revving up, investors will be watching for any signs management could start boosting dividends. Although expectations are likely to be dampened by comments last week from rival Commonwealth Bank, which said it is preserving capital amid uncertainty over the global regulatory environment.
Primary Health Care – Primary Health Care’s stock is down more than 10% this morning, after its first-half net profit of $76.6 million missed market expectations of $91 million. The first-half dividend of 15 cents was also below the expected 17 cents. The company said changes in healthcare funding make growth and revenue predictions for the full year "less definite" than usual. However, it had reasonable expectations that the group, in FY11 and FY12, should be looking to earnings before interest, tax, depreciation, and amortization growth rate of 15% per annum.
OneSteel – Australia’s second biggest steel producer reported 1H10 net profit of $117 million, down 49% on year, but still ahead of market expectations. Analysts’ estimates ranged from $50 - $100 million. The company said its overall profit performance was solid given the difficult economic conditions that included recovering (but with still relatively weak markets) and a stronger Australian dollar. It expects continued overcapacity in global steel production but notes that international prices appear to have bottomed. It anticipates net profit in 2H10 to be broadly in line with 1H10.
Overnight Market Report - 9.00am
With US markets closed for President Day Holiday overnight, attention turned towards European and UK markets for today’s leads. Stocks in Europe and the UK rose as banks and commodity issues supported the market and EU officials gathered to discuss further plans on how to tackle Greece’s debt problems.
The Dow Jones Stoxx 600 Index rose 0.4% in Europe, while the FTSE 100 added 0.5% in London trade.
SPI futures, which closed at midnight, are calling the Australia 200 CFD Index to open 0.2% higher at 4553. Leads look reasonably supportive for local trade as markets were led higher by strong performances from banks and materials.
The financial sector was the best performer in London, gaining 1.4%, as Barclays surged 5% and HSBC 1.1%. These leads should bode well for Australian banks today, although Westpac Banking Corporation’s trading update will be looked at closely.
Australian miners should be well bid after the FTSE basic materials sectors added 1.3%, led by Rio Tinto, Anglo American and BHP Billiton. They finished higher by 2.2%, 1.7% and 0.8% respectively.
Elsewhere, the FTSE oil and gas sector was up 0.3%.
In economic news, the National Australia Bank Business Confidence survey and Monetary Policy Meeting Minutes are due out at 11.30am. At 12.45pm, RBA Assistant Governor Debelle speaks.
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