ASX Close: Value investing sentiment emerging

Monday 1st February 2010

The ASX 200 lost 1% to close at 4524.1, the low of the day. The market significantly outperformed leads early on, however, as soon as Asian markets opened, the selling resumed and accelerated after the Chinese numbers.

There was a big turnaround in material stocks. Rio Tinto, for example was more than 2% higher early but closed down more than 0.9%.

As we mentioned last week, market sentiment has really turned sour, with the glass clearly seen as half empty. Today's strong PMI numbers are a classic example - what would normally be seen as positive for growth is now being construed as a negative.

Sentiment and confidence are very fickle in nature - as quickly as it turned south, market thinking could rebound, even without any obvious catalyst.

Let's step back for a second. Potentially we're 10 months into an economic recovery. On a three to five year basis, broadly speaking, current stock valuations are attractive. With the vast majority of money managers subscribing to the ‘value investing' discipline, it's only a matter of time before this market pullback becomes a buying opportunity.

In economic news, today's decline in Australian job advertising data should still raise some eyebrows ahead of tomorrow's RBA interest rate decision. For January, ANZ job ads slid 8.1% following more than 4% growth in both November and December. While the RBA is still widely expected to raise rates by 25 basis points, any slowdown in the job market could make waves in the months ahead as low unemployment levels have been at the forefront of a robust Australian economy.

Also, Australian inflation levels have continued to rise, gaining for the third month in a row. TD Securities Senior Strategist Annette Beacher said this means the RBA will soon have to start delivering a much more hawkish rhetoric, citing TD's monthly inflation gauge which rose 0.8% on month in January, 2.6% on year. She continued to say "in the light of recent confirmation that the unemployment rate has in fact been falling since July 2009, there is an opportunity to ramp up the hawkish rhetoric via referring to shrinking spare capacity, to assist in dampening future inflationary expectations".

The energy and material sectors detracted the bulk of the points today, finishing down 2.6% and 1.3%.

WorleyParsons and Santos led the energy names south, losing 3.6% and 3% respectively despite Deutsche Bank retaining their ‘buy' recommendation and ‘top' sector pick for Santos. Woodside Petroleum didn't fare too well either, closing the session 1.8% lower.

Among material names, Bluescope Steel was the biggest decliner, falling 4.6% on the back of further bearish leads from US Steel. US Steel lost 19% last week. Elsewhere, Fortescue Metals Group, Lihir Gold, Newcrest Mining, Rio Tinto and BHP Billiton were all down between 0.5% and 2.9%, with Fortescue Metals Group underperforming the most.

In a note from UBS, Energy Resources Australia's (-4.5%) FY net profit was in line with their forecast. However, UBS lowered their 2010 profit forecast for the miner by 9% on guidance for higher costs. The broker expects ERA's realised uranium prices to rise to about US$61/pound in 2010 as old legacy contracts roll out of the portfolio and are replaced with contracts struck in 2008 (when the average spot price was US$64/pound). UBS maintained their ‘buy' rating and $26.50 price target.

The financial sector followed US sector leads, finishing lower by 0.9%. Westfield Group fell the most, down 2.4% while three of the big four banks were all in the red by between -0.5% and 1.4%, with Westpac the biggest loser. ANZ managed to buck the trend, adding 0.3%.

On the upside, the consumer discretionary sector managed to add points, closing 0.5% higher after a profit upgrade from Aristocrat Leisure. The stock was the biggest gainer in the ASX 200, rising 11.1% after this morning forecasting an annual profit, before one-offs, of $116 million, which they say beat analysts' expectations. News, however, isn't all positive. Non-recurring items, including a $187.3 million impairment charge relating to a legal dispute in the US with bondholders, plus others like a write down of their multi-terminal gaming businesses; an intellectual property litigation settlement; property sales and restructuring costs, will result in the company reporting an annual net loss. The impairment charge on the bondholder litigation doesn't presuppose the outcome of the court action, so there's a chance Aristocrat could recoup the costs.

Also, in a report from Citigroup the stock was upgraded to ‘hold' from ‘sell' after their competitors reported December 2009 earnings. Citigroup said our key takeaway for Aristocrat is that our US unit sales forecasts look in-line with the experience of Aristocrat's main competitors, adding that WMS Gaming's management is bullish about Australia's prospects. The broker said despite sluggish replacement demand in recent years in Australia, WMS believes they will capture growing share in Australia given the video content they are introducing.

Elsewhere, in stock specific news, Qantas finished the session unchanged after saying they were in discussions with manufacturers on seat configuration, but that it was too early to give plans.

The comments followed a report in the Australian Financial Review indicating that Qantas was planning to get rid of two-thirds of first-class seats as part of a $400 million reconfiguration.

The plans, if correct, aren't a major surprise as Qantas had flagged a seat reconfiguration a few months back. However, the cost of changes and the major cuts in first class seats could unsettle some. According to the report, the cost would be spread over four years, with first class seats left only on some flights between Sydney and Los Angeles and Sydney and London.

Prices are in AUD unless otherwise stated.
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