Australian Investment Blog

Good Afternoon everyone

What Mattered Today

A pretty good effort by the local market today – bucking weakness overseas with the ASX closing in the black. A weak open with index options expiry saw the market down about 30pts early – before a pretty solid recovery took hold from midday onwards. A range of +/- points, a high of 5230 a low of 5192 and a close of 5228, up +20 points or +0.38%

ASX 200 Intra-day chart

ASX 200 Daily Chart

Goldman Sachs + Macquarie both upgraded Commonwealth Bank (CBA) today and the stock put on +1.91% to close at $71.47. Goldman’s were the more bullish of the two calling it a BUY and giving it an $82.79 price target – implying +18% upside from yesterday's close.

The rationale is probably most interesting.

1.The stock has dropped more than the sector has, largely a result of some PE re-rating, or in other words, the market believing that CBA should no longer warrant such a premium price to the others. GS reckon this is now done.

2. They also think that CBA’s earnings mix, being more housing, more deposits, more wealth management is of a higher quality than the other majors – who are more overweight institutional banking (which is under pressure)…

However, the main point of interest was around earnings expectations given their view that interest rates had now bottomed. We have also incorporated our economics team’s view that the easing cash rate cycle has now ended. As a result, we upgrade our FY17/18/19E EPS by 1.3%/1.5%/1.9% (Source Goldman Sachs)

That’s a theme we’ve been speaking about in the last few weeks – and that’s the theme that had underpinned our overweight call amongst the banks. Stocks tend to perform well when their earnings are being upgraded – it makes sense. If we start to see incremental upgrades to bank earnings at a time when they’re cheap relative to the broader market, banks should outperform. Important to note here that banks are typically always cheap relative to the market – they trade at about a 10% discount, yet right now they trade at about a 20% discount to the market. Food for thought.

Commonwealth Bank CBA Daily Chart

The other sector that should see earnings upgrades are the resource stocks. Consensus commodity price forecasts are generally lower than where spot prices currently trade. Once analysts roll forward their price forecasts – we should see higher numbers for resource stocks. We put a table in yesterday afternoon about BHP’s performance relative to the index. BHP us now up since the 1st August market high and has been a clear relative performer. We use BHP as a proxy for the resource space however when a stock remains firm in a weak market, it’s a clear sign of underlying strength.

BHP Billiton (BHP) Daily Chart

Myer (MYR) reported today and they were pretty much in-line with company guidance (slightly below the market) but a weak Q4 sales print took some of the shine off the result. They’re undergoing a major (5 year) transformation strategy - which the market seems to like, given shares are up more than 40% in the last 12 months. However the result today does nothing to warm ones heart. Top line revenue still struggling, margins remain under pressure, their major competitor – DJs have continued to do better on most metrics, and importantly, competition continues to intensify.

Listening to the CEO today gave us clear insight into the complexity of this business – weather, currency, fickle consumers, staff, competition and legacy issues are just some of the considerations. You’ve just got to back management on this one and keep your fingers crossed. A trading stock at best.

Myer Holdings (MYR) Daily Chart

On the economic front, we had employment data today with the jobless rate down last month to its lowest level in almost three years despite a decline in overall employment. Unemployment dropped to 5.6% from 5.7% in July versus an anticipated rate of 5.7%.

Overall employment dipped by 3900 jobs v an expected 11,500 job gain however the mix was stronger with full-time jobs up by 11,500, while part-time work fell by 15,400.

All up – nothing in this print to sway the RBA one way or another – they’ll be more focused on inflation and in particular, what happens with US interest rates when the Fed meet next week. The market has backed off on their expectations for September – now rating it a 20% probability while the market has December as a 52% chance.




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ASX 200 Movers



Select Economic Data - Stuff that really Matters in Green



What Matters Overseas

FUTURES down in Europe – up in the States.



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