ASX CLOSE: Investor confidence increases; market closes up 1.8%

Monday 9th November 2009

Across Asia, regional equity markets are mostly higher this Monday after G20 governments agreed to maintain stimulus efforts and hopes of an increase in merger and acquisition activity were boosted by AMP's and Axa SA's takeover bid for Axa Asia Pacific. Across the region, the Shanghai Composite is the only market in the red, down 0.1%. The Nikkei 225 is up 0.3% while the Hang Seng and Kospi are leading the way, up 1.1% and 0.6% respectively.

In Australia, the ASX 200 closed up 1.8% at 4674.9, slightly off session highs of 4680.3 despite relatively flat offshore leads. The market was driven by a pickup in consumer optimism and confidence on the back of M&A activity and strong corporate earnings results. Cyclical sectors and individual names leveraged to the global recovery story benefitted the most.

Globally, analysts have been forecasting for sometime an increase in M&A activity on the back of the global recovery. This finally looks to be gaining traction with stronger companies beginning to utilise their balance sheet strength, as we've seen with last weeks bid for Transurban, Buffett's purchase of Burlington Northern Santa Fe and today's opportunistic bid for Axa Asia Pacific.

Also helping sentiment was a pair of better-than-expected results from Commonwealth Bank of Australia and Orica, as well as a weakening US dollar.

The combination of the above events saw a marked increase in investor confidence. Despite the disappointing US employment numbers on Friday night, it's very encouraging to see the market follow through from Friday's strong close. This momentum buying has not been evident in recent weeks and may suggest another shift in investor psyche, possibly spring boarding the market towards those Christmas targets around 5000.

It was certainly a fantastic day to be an AXA share holder - the question from here, given that price action today has exceeded most analysts 12 month targets, is do I hold and hope for a higher bid or sell and take what's already on the table? Obviously, this will differ for every investor dependant on their risk profile. One analyst has already increased AXA's target to $5.75 whereas the AXA board have indicated a price with a ‘6-handle' would most likely be necessary to garner support.

Today's price action, combined with the above inferences from the Axa board indicate a revised bid could be in the offing. Should this be the case, AMP would again become the dominant force in superannuation after recently losing that status to National Australia Bank.

In economic news, the total number of job advertisements in Australian newspapers and on the internet fell 1.7% seasonally adjusted in October from September. The fall is the first since July. Acting ANZ chief economist Warren Hogan said "the data suggests the RBA needs to move with caution as it lifts rates over coming months". Also, Australian housing finance climbed 5.1% in September, beating expectations of a 3% rise. The figure was likely inflated by a last ditch effort by first-home buyers to take advantage of the government's grant scheme before it was wound back.

Turning our attention to the market and it was the consumer discretionary (2.5%), financials (2.1%), industrials (2.2%) and materials (1.6%) that added the most points today.

Among consumer discretionary stocks, Aristocrat Leisure was the best performer, rising 7.4% while the likes of WA News, Harvey Norman, Billabong International and Crown all rose between 3.5% and 5.6% on the back of improving sentiment ahead of the Christmas trading season.

In the financials space, Axa Asia Pacific was the standout, finishing 32.6% higher after receiving a takeover bid from Axa SA and AMP. Elsewhere, three of the big four banks were up between 1.2% and 4.5%, with Commonwealth Bank of Australia leading the way. Westpac Banking Corporation, however, was down 1% after trading ex-dividend today, as did Macquarie Group. However, it managed to close 0.5% higher for the session.

As mentioned above, AMP this morning announced a bid of $5.34 for Axa Asia Pacific. Axa rejected the bid, which was at a 24% premium to Friday's closing price of $4.30 per share. Southern Cross Equities said "the takeover proposal from AMP and AXA SA would be a win for both AXA Asia Pacific and AMP. It sees upside for AXA Asia Pacific shareholders through AMP share price in next few years as synergies and growth potential are achieved. AMP would create a more powerful and competitive business, gaining access to independent financial planners, as well as aligned planners and platforms. AMP capital would benefit from extra funds under management, coupled with additional scale benefits. AMP would be a clear leader in Wealth Management in Australia and New Zealand, with leverage to the positive Wealth thematic we have been pushing. We see it as an opportunistic bid, with the proposed price providing value for both AXA Asia Pacific and AMP".

Also, Commonwealth Bank of Australia this morning released their Q1 trading update which showed Q1 cash profit came in around $1.4 billion. Southern Cross Equities said "the group's 1Q cash earnings of $1.4 billion means it is tracking well ahead of consensus forecasts, and a bad debt charge of $700 million is fairly steady from the 4Q charge, indicating a stabilization. The group's margins are heading in the right direction, its wealth management arm is strong and the group has a smaller slice of the NZ market than some of its peers. Its outlook comments are somewhat cautious, but that's to be expected and really in line with the tone adopted by its rivals".

In the industrials sector, Toll Holdings, United Group, Downer EDI and Qantas were the standout gainers, up between 3% and 3.6%.

The materials sector added significant points too, thanks largely to Orica's strong FY result. It led the pack, up 5.6% while the likes of Newcrest Mining (3.6%) and Lihir Gold (3%) rose strongly as gold pushed through the $1100 barrier. Heavyweight miners BHP Billiton and Rio Tinto chipped in with more modest gains of 0.6% and 1.2%

Orica this morning reported a FY net profit before items of $646.1 million which was well ahead of Credit Suisse's forecast of $602.7. Credit Suisse said "it's a great result in both quality and quantum. The 12% rise in FY EBIT exceeded its estimate of a 9% gain, and market forecasts, and its forecast of higher FY10 net profit before items suggests earnings upgrades from other brokers will be forthcoming. It expects FY10 earnings of $660 million-A$680 million, subject to foreign exchange rates".

Prices are in AUD unless otherwise stated.
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