ASX CLOSE: Banks face uphill battle as markets slide

Monday 2nd November 2009

Across Asia, equity markets have slumped in line with the sharp sell-off witnessed on Wall Street where US stocks were smashed on Friday - giving back all of the previous session's gains as consumer sentiment and personal income and expenditure reports disappointed and the gloss of the stimulus amped Q3 GDP result began to wane.

The Shanghai Composite is beating to its own drum as per usual, higher by 0.7%, while the Hang Seng, Nikkei and Kospi are lower by 1.7%, 2.3% and 1.7%, respectively.

In Australia, the ASX 200 finished weaker by 102 points (2.2%) at 4540.40, well off its lows of 4517 reached earlier in the session. Losses for the day were broad based with the financials and industrial and material names leveraged to the global recovery story bearing the brunt of the selling pressure.

The US session on Friday and the corresponding spike in the VIX were confirmation that there has been a clear change in investor sentiment in recent weeks. With reporting season now at an end, focus this week will return to narrative from the Federal Reserve and upcoming economic data, namely this Friday's jobs report. Should the market continue to fall, the big question will be at what level will fresh, sidelined cash come back into the market.

Given the KBW banking index in the US was down 4.9%, banks were always going to face an uphill battle today. Certainly it was not a pretty picture with the sector off to the tune of 2.5% taking 47 points out of the index. Macquarie Bank, despite a slew of price target upgrades closed down 4.9% at $47.55. The ‘big four' closed down between 2% and 3.2% with NAB being the worst performer.

Macquarie Group's better-than-expected 1H10 result and strong balance sheet position has seen a number of brokers upgrade their price target on the stock for the upcoming 12 months. Deutsche were the most aggressive, boosting its target price by 71% to $60 from $35, RBS to $50 from $42.02, JP Morgan to $54.96 from $33.05 and UBS to $49.80 from $42.70.

It will be interesting to see how the banks fair tomorrow with the RBA announcing its interest rate decision.

This morning saw the release of the TD-MI inflation gauge which showed that inflationary pressures eased in October, with the annual pace of price gains running at their slowest pace in 7 years. According to the report, inflation fell 0.3% in October from September and is likely to further reduce the likelihood of a 50bp hike when the RBA holds its board meeting tomorrow.

With the USD strengthening during the US session on Friday it was little surprise to see base metals sharply weaker, dragging cyclical names leveraged to the global recovery story lower. Materials finished the day 2% lower taking 21 points out of the index. Heavyweight miners BHP and Rio Tinto were lower by 2% and 1.6% respectively, while other laggards in the sector were Fortescue Metals, Orica and Bluescope Steel, all weaker between 3% and 5.5%.

Consumer discretionary names were also lower on the session by 2.5%, not helped by a disastrous stock market debut by Myer which finished the day at $3.75, an 8.5% discount to its $4.10 IPO price.

It was a bit of a disaster for Myer and its promoters. After months of careful planning, looking to take advantage of robust equity markets and improving consumer confidence levels, Myer couldn't have picked a worse day to list, with the rollover in sentiment confirmed with Friday's Wall Street sell-off. Comments from Myer CEO Bernie Brooks that the upcoming Christmas period "would be good but not great" certainly didn't help the situation.

Investors now have to make the choice whether to hold on and see if Myer can produce a reasonable Christmas trading period that might warrant it trading on higher multiples, or whether to switch to other retailers such as JB Hi-Fi or Harvey Norman, where the growth prospects over the festive shopping period look a little more robust.

The float was pitched at longer term investors so once we have the stag traders out of the equation the stock should find support. Traders will want to see how the stock reacts to what is traditionally a strong period for retailers before closing out. Myer's loyal shareholder base will also be keeping an eye on David Jones' numbers on Thursday, with Q1 sales likely to increase 4.1% - traders will focus on the outlook for trading conditions and sales momentum.

Other retailers seeing selling pressure on the day included David Jones, Harvey Norman, and JB Hi-Fi which were all weaker between 2.1-2.4%.

The industrial sector closed down 3.2% and is now trading at an 8% PE discount to the broader market, however this gap may well close soon as analysts are starting to look relatively favourably on a number of stocks in this sector.

Bradken was the standout performer today up 1.4% at $6.37 after it was included on Goldman Sachs' conviction buy list. The rationale here is that earnings are tracking to forecast, signs seem to be improving going into 2010 and the stock is trading on compelling 13x forward earnings. Elsewhere, subtracting points from the market were Downer EDI down 2.5%, United Group down 1.55% and Asciano weaker by 1.96%.

Prices are in AUD unless otherwise stated.
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