Markets hit on Coronavirus, stocks exposed to China hardest hit (NWH, EHL, WSA, OSH)
WHAT MATTERED TODAY
While it was a weak session locally today the low point was seen early on in trade with buyers emerging into weakness, although some sectors were clearly targeted more than others. A lot of news surrounding the Coronavirus with the major implication being a potential reduction in global growth, stocks exposed to China were hit hardest today while the defensive yield / bond proxy trade benefitted from a decline in bond yields. Gold was also a standout as would be expected as demand for safe havens increased.
While the outbreak is a negative for growth, the offset comes from lower from longer interest rates and the potential for China to flex their stimulatory muscle at some point, which is clearly very likely. To date, the pullback is very orderly with the volatility index still at just 18, still low in historical terms. Around the region today, Asian markets were all lower, although mainland China remains on holiday. US Futures tracked higher during our time zone after the Dow declined ~450pts overnight.
Overall, the ASX 200 fell -96pts / -1.35% today to close at 6994, +30pts from the early session low, Dow Futures are trading higher by +124pts/+0.44%
ASX 200 Chart
ASX 200 Chart
CATCHING MY EYE
China Facing Sectors: Anything with a China focus today saw most selling, the resources hardest hit which is easy to comprehend given China now buys ~70% of the worlds Iron Ore and ~50% of global Copper production, Fortescue Metals (FMG) hit -7.29%, Oz Minerals (OZL) down –5.32% as a consequence however the selling didn’t end there. Travel related stocks also fell hard, Webjet the worst of them down by more than 13%, Qantas (QAN) -5.22%, Treasury Wines (TWE) -5.76% along with the Casino stocks all at the pointy end of the sell-off
Across our portfolios, the resources were the biggest weight, BHP, RIO, Oz Minerals (OZL) and Western Areas (WSA) all lower, WSA out with production numbers that Harry covers off below while NRW Holdings (NWH) ended down more than 7% after sadly reporting a fatality in one of their new divisions acquired through BGC. On the flip side, our Gold exposure did well while Costa Group (CGC) topped the leaders board adding +4% on the session with a big buyer emerging late in the day.
NRW Holdings (NWH) Chart
Emeco Holdings (EHL) Trading Halt: Double barrelled news this morning that their credit rating has been upgraded by Moody’s + they are raising capital to pursue an acquisition of Pit N Portal, a specialist in mining and equipment solutions specific to the hard rock sector. Reports being the acquisition will be earnings accretive from the get-go and EHL will fund via an entitlement issue from existing shareholders. EHL has one major shareholder who owns more than 20% of the company, implying they are in full support of the proposed deal (hence the pro-rata entitlement issue). We own EHL and await more detail.
Emeco Holdings (EHL) Chart
Western Areas (WSA) -3.65%; Hit a 4-month low today after announcing their December quarter production numbers to round out the half year. The only real surprise was a fall in sales for the quarter which dipped 20% on the second quarter. The company blamed the bush fires for delays in shipments while mill production remained strong and tracking in line with guidance for the full year.
Costs crept a little higher in the quarter although remained well within guidance of $2.90-$3.30/lb at $3.07/lb for the half. Shares were sold off today, although not all related to the quarterly. Nickel has tracked back to 6 month lows with the coronavirus epidemic impacting commodity prices across the board. We like WSA into the weakness, targeting ~$2.50 to up weight.
Western Areas (WSA) Chart
Oil Search (OSH) –7.52%; the OSH share price took a big hit today, following energy markets lower with increasing coronavirus fears, but also helped lower by a softer fourth quarter report. Production rose around 11% for the 2019 calendar year to 27.95mmboe, coming home with a wet sail to add over 7mmboe in the final quarter and land the year within prior guidance. Growth was driven by record PNG LNG production despite the impact of remediation work that has dragged on since an earthquake in 2018. OSH is in the middle of negotiating a new PNG development with talks remaining behind schedule – timing of projects in PNG have been an issue for most resources companies that take on the terrain – while early drill results out of Alaskan exploration place Oil Search in a good position to continue to drive production higher.
The company also gave early guidance for the new year, with production expected to be flat to marginally higher at 27.5-29.5mmboe in the current year. Oil search will report their full year results in late February.
Oil Search (OSH) Chart
Broker moves;
· Macquarie Group Cut to Hold at Bell Potter; PT A$150
· Macquarie Group Cut to Sell at Citi; PT A$123.50
· Webjet Cut to Underweight at Morgan Stanley; PT A$10
· Bank of Queensland Raised to Neutral at JPMorgan; PT A$7.70
· Rhipe Raised to Buy at Bell Potter; PT A$2.60
· TPG Telecom Raised to Neutral at Credit Suisse; PT A$6.70
· Cooper Energy Rated New Neutral at JPMorgan
· Insurance Australia Cut to Hold at Bell Potter; PT A$7.90
OUR CALLS
No changes across portfolios today.
**CORRECTION**In the Weekend Note we covered off the following in terms of potential portfolio moves, however there was a contradiction in the list around our holding in Bingo (BIN). Bingo should not be in the Adding to list. We covered off on BIN above today and its strength in a market that was falling away is encouraging. We are sitting tight for now.
We have a few positions we are considering adding to, selling and switching etc. in the coming weeks depending how markets evolve – a quick summary of our current thoughts are as follows:
Selling: Bingo (BIN) Newcrest Mining (NCM) and Evolution Mining (EVN).
Reduce: NRW Holdings (NWH) – slightly if at all.
Adding to: Boral (BLD), Bingo (BIN) and Western Areas (WSA).
Buying: Sandfire Resources (SFR) or South32 (S32) and a2 Milk (A2M).
Major Movers Today
Have a great night
James, Harry & the Market Matters Team
Disclosure
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