ASX Close: Investors start to get their appetite back

Wednesday 3rd February 2010

The ASX 200 finished 0.9% stronger at 4647.9, slightly off morning highs of 4656.9. Gains came from the cyclical sectors leveraged to the global economic recovery. This is a positive as it possibly indicates a re-emergence of risk appetite.

Overnight gains in commodity prices saw some of the heavyweight miners and energy names outperform for a second consecutive day. Whilst it's positive to see further follow-through buying today, buyers seem to be lacking yesterday's conviction. It looks like we're seeing a few sellers return to the market, especially among the big four banks and defensive sectors.

It seems our major banks are still coming to grips with yesterday's shock rates decision and the potential impact on their earnings prospects.

Tonight's trading action will be crucial. Recent gains have been on lower volumes than the down days, pointing towards continued caution among participants.

In economic news, Australia's trade deficit pushed wider on-month, coming in at $2.25 billion versus expectations of $2.5 billion. This was helped by exports rising 4% on months, however imports jumped 6%.

Turning our attention to the market and it was the materials sector leading the way again. It rose 2.3%, with Fortescue Metals Group fronting the risers, up 6.2%. Orica, Newcrest Mining, BHP Billiton, Rio Tinto and Bluescope Steel were all up between 1.4% and 2.9% after base metals prices all gained overnight.

In a report from Royal Bank of Scotland, Australian steel stocks were moved to ‘overweight'. The broker said with the steel sector earnings moving past the cyclical bottom, PE multiples normalising, and valuations well below long-term averages, there is significant value emerging across the sector. They believe the potential for a rally in steel prices and a recovery in global demand could act as further catalysts for the sector.

They also note that after the impact of a severe destocking cycle in early 2009, earnings in the steel sector have begun to recover. With demand steadily increasing, prospects for strong steel price increases, and improving margins, RBS see 2010 as the start of the earnings growth cycle. They continue to prefer stocks with the greatest long-term earnings recovery leverage, naming Bluescope Steel as their top sector pick, followed by OneSteel and Sims Group.

The consumer discretionary sector was another strong performer, rising 1.9% on the back of a 5.4% gain in News Corporation shares.

News Corporation smashed Q2 market expectations on nearly all metrics. Whilst a profit upgrade was expected, the magnitude clearly surprised. FY 2010 operating earnings are now expected to grow in the low 20% range. Impressively, the full impacts of Avatar and an improving US advertising market are not expected to benefit the company until next quarter.

Elsewhere in the sector, retailers Billabong International, JB HiFi and Harvey Norman were all up between 1.4% and 2.8%, benefitting from yesterday's ‘on hold' interest rates decision, as well as positive comments from Goldman Sachs JBWere.

Interestingly, in a note from UBS, Crown's (2.6%) target price was cut to $10.15 from $11.20 after expectations of a disappointing performance from their Melco JV when they reports earnings. UBS said given MPEL's balance sheet issues, Crown has various options relating to their MPEL stake. They believe Crown can add additional capital; continue to be diluted down in any potential MPEL raising; or exit their MPEL stake to a strategic buyer. Absent any strategic moves by Crown (given their already strong balance sheet) they could use any additional cash from an MPEL sale for a buyback.

Among industrials, housing stocks were in focus after a strong pending home sales number in the US and a broker report from UBS. It said Boral and James Hardie were upgraded to ‘buy' from ‘neutral'. The broker believes that value is emerging after share price falls in January. UBS forecasts annual EPS growth of 25-35% from FY10 to FY13 for both stocks. Boral was the best performer, up 4.5% while James Hardie rose 3.8%.

In the energy sector, Santos, WorleyParsons, Oil Search & Woodside Petroleum were all up between 0.9% and 2%, driven by strong overnight gains in Crude Oil futures.

However, on the downside, ROC Oil was the biggest faller in the ASX 200 today, finishing 30.8% lower after announcing a huge downgrade to reserves at Basker-Manta-Gummy. The first integrated full field reservoir simulation model resulted in estimates of proved and probable reserves being slashed to between 3 to 5 million barrels from the previous 18 million barrels. ROC believes the downgrade will reduce the group's 2P reserves by 20-25%.They will reveal the extent of the impairment associated with the downgrade in their results on February 25 and is reviewing their future plans for the field.

Suncorp-Metway (5.9%), Macquarie Group (5.2%) and Insurance Australia Group (4.5%) were the standout performers among financials. However, the big four banks were all down between 0.2% and 0.6%.

Prices are in AUD unless otherwise stated.
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