Australian Investment Blog

Can the BHP result reignite the ASX200?

Stock markets have almost moved into hibernation around the world e.g. the US market has not experienced a daily move up, or down, over 1% in 5 weeks, this degree of stagnation has only occurred 5 times since 2010. The ASX200 has now traded sideways for 9 days, ignoring some gains in other markets. It feels to us that if the local market is going to make another assault on the 5600 area BHP and the resources are likely to be the catalyst.

Although the headline numbers from BHP yesterday painted a weak picture, markets and share prices are all about the future and there was some extremely positive undertones to the result – more on that below.

The technical picture for the ASX200 still points to a test of the 5625-5650 area before further consolidation but a close over 5560 is required to trigger a bullish signal.

ASX200 Daily Chart

As we touched on in the afternoon report, BHP Billiton (BHP) announced their profit numbers after market yesterday to produce some very negative tabloid style headlines - " BHP loses $US6.38 billion!" but importantly they forecast $US7 billion free cash flow for 2017 at current consensus commodity prices. The term ‘consensus’ is key here as that number across most of BHP’s commodity complex is substantially below current spot prices. Should commodities remain firm (or even stable) then we’ll see upgrades to consensus commodity price forecasts which will drop directly into upgrades for BHP earnings.

Simply BHP has experienced an awful year , with some big one off painful hits but the clear feeling is that FY16 was the low point for BHP earnings. The toughest of periods is now behind them and some clear skies andoutperformanceis likely.

This chart looks at BHP share price versus earnings per share. Not rocket science, however, it clearly shows that share prices will track earnings. If conditions are ripe for a period of EPS upgrades then the share price will follow.


Source; Shaw and Partners Research

A relief rally similar to last weeks by ANZ Bank (ANZ) would not surprise.

Resource-based businesses are clearly cyclical being dependent on commodity prices and we have just witnessed a once in a decade correction from the resources sector from which the recovery historically is likely to last at least another 3 months.

BHP, along with a number of other key producers have shown a strong ability to cut hard, and reduce the overall cost of production, making us confident of some very healthy profits on the horizon, for 2017: Oil ~ $US10/barrel and Iron Ore ~ $US14/tonne.

Technically we got a sell signal when BHP broke $19.20 but the lack of follow-through has switched us neutral to positive, we strongly feel the next 10% for BHP is more likely to be up.

BHP Billiton (BHP) Weekly Chart $20.25

RIO Tinto (RIO) is a world class iron ore producer which has rallied around 30% in 2016 compared to FMG which is up around 300%. We believe the relative value has now moved too far and RIO is a buy in the sector.

While RIO is not overly clear from a technical perspective, our preferred scenario is a move up towards the $56 area.

RIO Tinto Ltd (RIO) Weekly Chart $48.46

Fortescue Metals (FMG) has surged over 300% in 2016 as the iron price has increased and the company has performed extraordinarily well paying down large chunks of debt. The market was negative Fortescue (FMG) until they started to effectivelyexecuteof their strategy. BHP now seems to be in a similar boat.

While we feel on a comparative basis FMG has rallied too far technically it remains bullish targeting the $6 area.

Fortescue Metals (FMG) Monthly Chart

Summary

• We remain bullish stocks short term and continue to believe that the best returns over the next 3-6 months will be generated by a more active approach.
• Following on from the above we believe it is catch up time for BHP and RIO and favour these two heavyweights in the currently positive resources space.

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Overnight Market Matters Wrap

• The US markets finished weaker ahead of the release of the Fed minutes due tomorrow in the US. The Dow closed down 84 points (-0.5%) to 18,552 whilst the S&P500 closed down 12 points (-0.6%) to 2,178.
• Oil pared gains from earlier in the day after a report showed a surprisingly strong build up in US gasoline stocks. Crude oil finished up 84c (+1.8%) to US$46.58/bbl
• Gold had a strong night, rising US$10.20 (+0.8%) to US$1,350.50/oz which was US$5 off its high of the day after mixed economic data during the day.
• Another strong night in Iron Ore saw the metal rise US$1.81 (+3%) to US$62.02/t
• Last night BHP Billiton (BHP) reported a weak FY16 result, but although it had some bad headline numbers, most of the bad news was already in the market. BHP closed 1% higher in the US to an equivalent $20.46.
• The ASX 200 is expected to open 11 points lower, near the 5,520 level as indicated by the September SPI Futures this morning.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 17/08/2016. 9:00AM.

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