ASX CLOSE: Positive day on the markets

Thursday 15th October 2009

It was a sea of green across Asia today as markets globally advanced on JPMorgan's better-than-expected Q3 results, South Korea's POSCO raising their profit forecasts and investors speculation that there are more positive earnings reports to come from the US. The Nikkei 225 was the best performer, closing up 1.5% while the Korean Kospi was up 0.5%. The Hang Seng is currently 0.9% higher while in China, the Shanghai composite is up 0.5%.

Down under in Australia, the ASX 200 closed 0.6% higher at 4859.9 after earlier trading as high as 4895.3. The materials, consumer discretionary and industrials sectors added most of the points as sentiment was boosted by better-than-expected stock specific news and strong economic data.

However, the market drifted from this morning's highs as investors looked to take some profits from the table ahead of a heavy calendar tonight.

The combined affect of strong corporate news and economic data is very powerful, as we're seeing. Those who are underinvested are being forced to jump on board at the risk of missing out while those already invested are lifting their strategic weightings to equities in anticipation of further improvements in economic data and corporate earnings.

With US corporates smashing Q3 expectations and delivering on top line earnings growth, even the nonbelievers are beginning to believe, second guessing their initial thoughts and entering the market.

Even after such a strong rally, it's incredible to believe that earnings expectations are still way too low. For JPMorgan to beat EPS forecasts by 57% is amazing and shows just how much upside potential still remains in this market. One would have thought analysts would have learnt their lessons after Q2's stellar performance, but this doesn't seem to be the case.

A slightly more hawkish address today from RBA Governor Glenn Stevens fuelled the fire already burning under the Aussie dollar, and saw the local currency surge through 92c as the market began to contemplate the possibility of a 50 basis point hike in November. With the USD's demise seemingly growing by the day, and risk appetite in abundance courtesy of surging equity markets, the AUD has been a one way trade of late with little resistance seen until 0.9325.

Turning our attention to the market and the materials sector added the most points, rising 1.1% after a strong set of leads from US and UK stocks. Fortescue Metals Group (2.8%), Rio Tinto (2.4%), Bluescope Steel (1.9%) and BHP Billiton (1.3%) were the major risers.

The two major gold miners in Newcrest Mining and Lihir Gold had a bit of a pullback, down 1.3% and 3.3% after UBS downgraded both of the stocks to ‘neutral' following share price rises and lower earnings forecasts. It said "the strengthening AUD/USD has prompted its to lower net profits forecasts for Newcrest Mining by 25% in FY10, 24% in FY11 and 13% in FY12. More of Lihir's costs are denominated in USD, so reductions to its forecasts for net profit are less severe; down 2% in 2009 and 5% in both 2010 and 2011. Traditional demand for gold remains weak but price is being driven by technicals and ongoing USD weakness, suggesting new highs are likely in coming weeks".

UBS also lowered Rio Tinto's earnings forecasts after factoring in a strong Australian dollar. It said "the miner's 3Q production report was strong, with iron ore, copper, coal, aluminium and alumina all coming in better than forecast. It is now factoring in Rio Tinto's upgrade to iron ore production guidance, but its revision to currency forecasts sees earnings for 2010 trimmed by 4% and 2011 by 6%". It maintained its ‘buy' rating.

The industrials sector had a good day too, rising 1.1% with the likes of Macquarie Infrastructure Group, Toll Holdings, Macquarie Airports and Qantas all up between 1.7% and 3.3%.

Qantas had its target upped by UBS to $3.20 from $2.90. UBS said "it has lifted its AUD/USD forecast to 0.8800 and adjusted revenue and cost forecasts which lead to a 13% cut to FY10 net profit forecast but 15% increase for FY11 profit. Analyst believes there's been "excessive optimism" on pace of expected yield recovery across airlines, not expecting revenue growth until June 2010 quarter. UBS retained its ‘neutral' rating.

Elsewhere, the consumer discretionary sector added significant points, finishing 0.7% higher as JB HiFi (5.6%), Billabong International (4.2%), Harvey Norman (2.6%) and David Jones (2.1%) continued to pile on the gains following a stronger-than-expected US retail sales figures overnight and yesterday's bullish statement from JB HiFi management.

Just to add more fuel to the fire, JB HiFi was boosted by numerous brokers too. Credit Suisse upgraded it to ‘neutral' from ‘underperform'. It said "while the company maintains FY 20% sales growth forecast, it now appears a chance it could exceed that. For the September quarter, like-for-like sales rose 8.4%.

Deutsche Bank also chimed in, upping the retailer's target to $22.75 from $17.70 and said "the strong trading in a post-stimulus environment reinforces our belief that JB HiFi will continue to experience above-market growth rates driven by structural growth in the home entertainment category". UBS and Morgan Stanley both retained their respective ‘buy' and ‘overweight' ratings but upped their targets to $21.50 from $18.95 and to $23 from $21.

Prices are in AUD unless otherwise stated.
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