ASX CLOSE: Market finds strength from materials and industrial sectors

Wednesday 3rd March 2010

In Asia, regional markets are all modestly higher this Wednesday as concerns over Greece continued to ease and strong moves among resource stocks bolstered gains. The Shanghai Composite is the best performer, adding 0.4% while the Kospi, Hang Seng and Nikkei 225 are all up between 0.1% and 0.2%.

Locally, the ASX 200 was firmer by 0.7% at 4735.7, slightly off earlier highs of 4745.70. The underlying strength came from the materials and industrial sectors today on strong volumes, with consumer discretionary names shrugging off yesterday's interest rate hike.

Upside momentum in base metals markets (instigated by the Chile earthquake) drove robust gains at the stock specific level, with many of the pure play miners following in the footsteps of the bigger-diversified ones.

For example, a 4% gain in nickel prices overnight has pushed it to 16-month highs, driving strong gains in the likes of Panoramic Resources, Minara Resources, Western Areas and Mincor.

A spike in the gold price above US$1130 per ounce boosted the local gold miners.

This morning's stronger-than-expected year-on-year GDP read supports the RBA's rhetoric that growth is returning to trend and in our view justifies yesterday's hike.

In economic news, Australia's GDP data affirmed the RBA's aggressive rate hikes in 4Q and points to more down the track. 4Q09 GDP rose 0.9% on-quarter and 2.7% on-year, confirming Australia's place as one of the strongest growing economies globally. Government spending and strong business investment helped fuel the growth that could now add to calls for a faster withdrawal of economic stimulus. The data supports the RBA's view that the economy is quickly approaching long-term historical average rates of growth, which explains stellar jobs growth over recent months.

Materials ended the day as the session's best performer, higher by 1.8% on the back of continued momentum in the base metals markets. Heavyweight miners BHP Billiton and Rio Tinto closed up by 1.4% and 2.6% respectively while gold miners Newcrest Mining and Lihir Gold saw gains of 1.4% and 4.7% respectively, with the gold price surging north of US$1130 oz. Fortescue Metals Group added 3.2%.

In a resources based strategy paper from Credit Suisse, it sees value in the Australian resources sector and is currently buying BHP, Rio Tinto, Alumina, Centennial Coal, BlueScope Steel and Fortescue. CS believe that while no one was opening the champagne, the companies are certainly looking for a continuation of a steady recovery in demand, with rising capex and higher dividends evidence that it is not just hollow rhetoric. It noted a clear distinction between bulks and metals, with more optimism on iron ore and coal versus base metals. Still, the broker believes capital management initiatives are unlikely until companies have much clearer path to economic recovery.

The industrials sector was the second best performer today, rising 1.5%. Macquarie Airports, Brambles and CSR were the standouts, up between 1.8% and 4.4% with Macquarie Airports the biggest gainer.

Interestingly, in a report from Goldman Sachs, it has identified margin upside for a host of large caps, with the preferred being Amcor, Sims Metal, Boral, Bluescope, United Group and Qantas. Goldman said EBITDA margins this reporting season (although recovering from record lows) are still below the levels set in December 2008, during 1990-91 recession and the long-term average since 1990. The broker's margin analysis continues to indicate that alpha opportunities remain in cyclicals, with upside risk to earnings as margins revert to, or above, long-term averages. In a separate note from Macquarie Group, it said the recent positive earnings momentum is reflecting a "V" shaped recovery. It continued by saying valuations remain cheap, with the one-month forward price-to-earnings ratio still below 14 times. The broker continues to see more than 15% upside for the market over the next year despite expectations of further significant interest rate rises.

Elsewhere, consumer discretionary names had a strong session, shrugging off yesterday's interest rate hike. The sector added 1.3% with the likes of Fairfax Media and Tattersalls rising 3.4% and 3% respectively. Retailers had a good session with Harvey Norman, JB HiFi and David Jones all finishing the session higher by between 1.8% and 2.1%.

With the market in a bullish frame of mind it was not surprising to see an underperformance of the defensive sectors with healthcare, information technology and utilities all weaker between 0.3% and 0.5%.

Prices are in AUD unless otherwise stated.
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