ASX CLOSE: Financial sector drags market lower

Monday 19th October 2009

In Asian trade this Monday, equity markets are mixed as traders and investors digested the weak leads from Friday's session in the US and ponder whether or not equity markets have been too aggressive in pricing in better-than-expected earnings. The Nikkei 225 is down 0.1% while the Korean Kospi is higher by 0.2%. Also, the Hang Seng is up 0.4% while the Shanghai Composite is 1.5% stronger.

In Australia, the ASX 200 was down 0.9% at 4792.8 after trading as low as 4772.1 this morning. The financials, energy and materials sectors detracted the bulk of the points as traders rotated a bit of cash towards the more defensive sectors. The consumer staples and telecommunications sectors were both in the black, indicating some nervousness among market participants ahead of a heavy week of US Q3 reports.

This week's trade, both locally and in the US is packed with potential catalysts that are crucial in determining market direction over the next month or two. Given the reaction to Citigroup and Goldman Sachs better-than-expected Q3 reports, it certainly looks like markets are priced pretty close to perfection. Anything slightly negative will likely see the stock and or market sold off.

We've seen staggering rallies over recent months as equity markets recover from last year's carnage. However, the consensus now seems to be that the easy money has been made and that companies need to step up to the plate and deliver on both top line and bottom line expectations.

Tomorrow, Woolworths is releasing its Q1 sales update. Analysts are expecting another fantastic result with group sales growth of 5% to $13.5 billion. Again, the result should be led by the Australian food and Liquor division with like for like sales growth of 6.5%. The market will be looking for a slight turn around in New Zealand and maybe some continued weakness in the petrol division given lower oil prices.

There should be no change to their FY10 NPAT growth guidance of 8-11%. Given most brokers are neutral on the stock, a really positive result and outlook could see broker re-ratings spur further gains in the stock.

As mentioned above, the financials sector was the biggest drag, losing 1.8% for day following weak leads from the US. The S&P Financials sector and the KBW Bank Index were both significantly lower, down by 2.6% and 3.2%. Locally, ANZ and AMP were two worst performers, down 3.4% and 3% for the day. Among the other big banks, all three were down between 1.4% and 2.5%, with Westpac Banking Corporation underperforming the most.

Despite a strong overnight performance and stable Asian trade for Crude Oil, the energy sector was one of the major detractors today, down 0.9%. Santos and WorleyParsons led the sector lower, weaker by 2.4% and 1.6% as investors looked to raise cash for the Oil Search share placement.

Oil Search were forced into raising capital through and institutional placement after its deal to sell a 3.5% stake in its PNG LNG project to the Abu-Dhabi based International Petroleum Investment Company was terminated. It raised $895 million at $5.95 per share.

Just a few months ago Managing Director Peter Botten suggested Oil Search should be able to avoid a capital raising to finance its share of PNG LNG. The collapse of the IPIC transaction is clearly a setback with the resulting institutional share placement taking the market by surprise. As we know markets hate surprises and analysts would certainly have preferred the original equity sell down rather than a dilutive capital raising. Watch for some potential downgrades to EPS forecasts on the back of this transaction.

The materials sector was also weaker, down 0.5% as the likes of Fortescue Metals Group (-3.6%), Amcor (-2.5%), BlueScope Steel (-1.2%) and BHP Billiton (-0.3%) all saw selling. Macquarie Group retained its ‘outperform' rating and $6.50 target on Amcor ahead of Thursday's annual investor meeting. The stock is trading at a 23% discount to the market versus an average 10% p/e ratio discount since 2003. It said "regulatory approval of the Alcan deal (by January) and greater focus on synergy potential and delivery plan are what is required to reduce this discount. Conditions remain tough in 1H, largely due to weaker volumes across most divisions. North American PET volumes remain weak, and Europe's flexibles volumes are down on this time last year. A rising AUD makes things difficult for Amcor's Australasian business, although higher old corrugated container prices are a positive for fiber export returns".

Elsewhere, Goldman Sachs JBWere believe the recent bid from BHP Billiton for United Minerals shows the potential for Australia's junior iron ore minors to be re-rated. The broker said "while this transaction is not particularly material for BHP, it highlights the strength of the iron ore market in that companies who have picked up what was previously seen as unattractive ground are now being seen as strategically important. United Minerals was uniquely well placed given its proximity to BHP Billiton operations, but lists other junior miners with tenements near BHP infrastructure as Atlas Iron, Warwick Resources, Giralia Resources, FerrAus and Iron Ore Holdings".

Prices are in AUD unless otherwise stated.
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