Do we buy BT Investment into potential weakness today?
The Australian market managed to close marginally higher yesterday but still remains over 3% below the high for May while US stocks continue to make all-time highs. The majority of the weakness locally has come courtesy of our banks who have been slugged with a new tax in the budget, just when investors are becoming increasingly concerned over their exposure to our “very hot” property market – the banking index is down almost 7% for the month. We are watching Canada closely for clues to how our property market may fair moving forward and may discuss this in more detail in a future report.
On an index level we continue to believe the local market is suffering its “sell in May and go away” correction with a close over 5830 required by the ASX200 to switch us back to a neutral stance i.e. 1.1% higher. While we are not receiving any assistance from the US on this view China’s credit downgrade looks to have put a halt on our resources strength for now.
Importantly at this stage we still believe any weakness over this May-June period is an opportunity to buy, not panic sell.
ASX200 Daily Chart
US markets rallied yet again last night with the S&P500 closing up 0.2% at an all-time high. We remain short-term cautious / bearish but very aware of the strength of this underlying bull market, the path of least resistance clearly remains up.
We continue to remain buyers of weakness while not believing this current advance to fresh highs will follow through with any meaningful momentum. Technically we regard the NASDAQ on a weekly basis as one of the clearest charts at present with our ideal buying scenario a +250-point retracement.
US NASDAQ Weekly Chart
In the short-term the Dow remains bullish targeting the 21,500 area / 2.5% higher. Considering the poor market news it has shrugged off recently this has now become our favoured scenario into June before a potential pullback.
US Dow Jones Daily Chart
Overnight Macquarie equities desk were handed the mandate to sell Westpac Banks 19.2% stake in BT Investment Management. The targeted price for the 60 million shares was $10.25-$10.75, a significant discount to yesterday’s closing price. The question we ask ourselves this morning is do we buy the potential weakness early today.
BT Investment (BTT) Monthly Chart
We continue to like the local financial sector but we do have significant exposure in the MM portfolio already. Also importantly BTT is very much Europe facing as was illustrated by its plunge following the BREXIT vote. Considering we already own Henderson Group (HGG) within the sector, which has significant exposure to the UK and a potential hard BREXIT we feel it’s prudent for MM not to outright buy any weakness in BTT this morning.
However, if we were not holding HGG we would have definite interest in BTT sub-$11.
Hence we have a potential switch opportunity:
If we are able to take a ~12% profit in HGG around $4.10 and buy BTT below $11 we will switch today – or put another way a $6.90 difference, or better.
ASX200 Quarterly Chart
Conclusion (s)
We will not outright buy potential weakness in BTT this morning but will follow the below switch:
If we are able to take a ~12% profit in HGG around $4.10 and buy BTT below $11 we will switch today – or put another way a $6.90 differential.
*Watch for alerts*.
Overnight Market Matters Wrap
· The US equity market continued its recovery, once again nudging record highs, having now regained all of last Wednesday's sell off, as the Federal Reserve still appears to be sticking to its plans to raise rates at the next meeting in mid-June despite recent weaker economic data.
· Commodities were generally weaker, with iron ore in particular slumping back towards US$ 60.50/t (Chinese futures fell as much as 5.6% yesterday at one point), following the Moody's rating downgrade yesterday of China's credit rating, which increased concerns about China's ballooning debt levels. Oil prices were also slightly easier after the recent strong run, ahead of tonight's OPEC meeting which is expected to extend current production cuts for the rest of the year.
· The June SPI Futures is indicating the ASX 200 to open 14 points higher, towards the 5,780 area this morning.
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