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ASX Close: Industrial sector best performer

IG Markets Ltd

Wednesday 20th January 2010

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The ASX 200 finished 0.1% higher at 4868.2 after trading as high as 4905.8 this morning. The market got off to strong start with both the heavily weighted financial and materials sectors adding significant points.

However, the reports from China that officials have asked certain banks to stop lending for the remainder of the month have caused concern, sent traders in the materials space scurrying around midday, with the ASX 200 losing roughly 30 points over the course of an hour.

Chinese regulators asked some of the nation's banks to limit lending after they failed to meet requirements including those for capital, said Liu Mingkang, chairman of the China Banking Regulatory Commission.

The CBRC hasn't asked all Chinese banks to halt lending.  "We have a number of regulatory requirements to ensure prudent supervision," Liu said in an interview in Hong Kong today. "For those that failed to meet these standards, we told them to limit lending."  

The materials sector was hit hard by these reports. It's another sign the Chinese economy is running at full steam. Obviously attempts to slow it will be met by short-term weakness but in the long run, this should be seen as a positive as it helps prevent the economy from overheating and asset bubbles from forming. 

It's nice to see commodities rising and materials names being bid in the faces of a higher USD. We've started to see real evidence that there is more to the commodities trade (such as underlying demand fundamentals) than just an inverse relationship with the dollar.

This augurs well for 2010 and provides a degree of confidence that we won't necessarily see a precipitous unwind of the risk trade - which is one of the markets' greatest fears heading into next year.

In economic news, Westpac's Consumer Confidence jumped 5.6% in December, defying history that usually suggests confidence falls after the RBA starts a rate hike cycle. In a note from UBS, the rise (the strongest in 6 months) makes a 25-basis-point hike next month even more likely. The RBA next meets on 2 February and the majority of analysts are expecting a fourth hike since tightening began in October.

UBS believes the rise in confidence suggests the level of the cash rate remains stimulatory enough to boost confidence, given the improving circumstances of the economic backdrop.           

The industrial sector was the best performer in terms of percentage gains, adding 1.1% thanks largely to a huge 6.5% jump in Macquarie Airports shares. The recovery in traffic at airports continues with international traffic rising 11.4% in December from a year earlier with total traffic up 8% for the month. Traffic at Copenhagen airport rose 3.9% for the same period. The only laggard was Brussels airport, where traffic fell 1.1% as heavy snow falls affected operations late in December. In a note from Macquarie Group, they retained their ‘outperform' rating and $3.40 price target following the results.

The broker said Macquarie Airports is in a sweet spot, with a strong Australian economy fuelling airlines to grow capacity, while Sydney's international terminal upgrade is coming on-line. Macquarie Group believes this is an ideal situation to capture the passenger leverage. We anticipate a further 0.7x will be added to the EV/EBITDA multiple, bringing the equity rating back to levels seen in 2007. The expansion reflects confidence in the outlook, and that Macquarie Airports has delivered a predictable earnings stream during the cycle. 

Macquarie Infrastructure Group and Toll Holdings also had a strong session, both rising more than 2.7%.

Strong media stocks helped the consumer discretionary sector to a higher close. It gained 0.9% with the likes of Fairfax Media, West Australia News and Ten Networks rising by between 1.2% and 2.8%.

Elsewhere, in a report from UBS, JB HiFi's (1.4%) price target was upped to $24.25 from $21.50, on anecdotal evidence suggesting sales momentum has remained strong, citing the switch to digital TV from analog in Australia and the store roll-out program.

UBS said despite JBH's challenging valuation (stock is trading around 20x FY10 price-to-earnings ratio), they maintain their ‘buy' rating with the following in mind: Store roll-out program dilutes macro related risks with scope for upside from increased operating leverage and; increasing scope for capital management in the form of a special dividend and/or an increase in the targeted 50% payout ratio.  

The financial sector added significant points, finishing 0.2% higher although it was well off its morning highs. Bendigo & Adelaide Bank led the way, gaining 2.5% while Macquarie Group added 1.9%. The big four banks were mostly lower despite solid leads from US counterparts. ANZ was the only one to finish in the black, up 0.3% while the remainder were all down between 0% and 0.9%.

The materials sector was responsible for the midday selloff as investors reacted to the reports from China. After being up approximately 1% in morning trade, it eventually closed down 0.2% with Alumina, Lihir Gold and Newcrest Mining amongst the biggest decliners. They were down between 1.5% and 1.9%. BHP Billiton and Rio Tinto were higher by 0.2% and 0.1%, well off their morning highs.

In a report from Morgan Stanley, BHP Billiton's production report was noted as reasonably strong overall and a higher than expected proportion of iron ore spot sales was a positive. BHP said 54% of its Australian iron ore in the first-half was sold at benchmark prices with the remainder sold on shorter-term reference pricing (a mix of spot and indexed sales). Morgan Stanley said the higher spot sales are due to the strength of demand; with spot prices well above benchmark prices. Analysts will be reviewing their forecasts for earnings from BHP's iron ore division. The proportion of spot sales is above market anticipation, so we think that is where people will really have to focus their attention.

 

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
This information is provided for information purposes and should not be regarded as financial product advice. This information does not take into account your specific objectives, financial situation or needs. Therefore you should consider the information in light of your specific objectives, situation or needs before making any trading or investment decision. IG Markets recommends you take independent financial advice before any decision whether to trade with IG Markets in the products we offer.



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