Market Matters Afternoon Report Thursday 21st April 2016

Afternoon Report 21/04/2016

Market Matters Afternoon Report Thursday 21st April 2016

Good Afternoon everyone

Market Data

What Mattered Today

Another solid session for Aussie stocks with BHP hitting our previously advised target of $21.20…..up +3.49% to close at $21.05 on the day ($21.26 high)….Impressively, in the last 10 trading days, BHP has rallied +32% - a big move on the back of strong commodity prices and changing sentiment towards the sector. We’re seeing a LOT more positive commentary focussed on the miners, yet in our view, it’s time to get on the SELL SIDE given risk/reward no longer stacks up.

Interesting to hear comments by BHP’s president of mining operations in Australia, Mike Henry today at the Melbourne Mining Club, who thinks stronger prices are a short term thing given there is still lots of low-cost iron ore to work its way through the market. Obviously higher prices are good for the miners BUT we’ve also seen a decent uptick in the Aussie dollar as well which will offset some of the benefit to earnings….

Below shows forward PE of the material sector…which is high at 24 times forward earnings v 10x historical earnings….which, although it seems scary is fairly common as cycles turn and analysts are slow to upgrade earnings – we generally see about a 6 month lag. The issue here is that if earnings don’t get revised up, and stocks have already priced it in ahead of time, then we’re likely to see a correction.

We do think resource earnings are turning, and that will drive outperformance of the Australian market in 2016 v the US, HOWEVER, we think share prices have gotten ahead of themselves…Rallied too hard too fast.

….and here’s consensus on BHP….12 month price target of $19.72 based on 20 Analysts

Source; Bloomberg

We’ve spoken recently about South 32 (S32), which was spun out of BHP calling it a BUY at the start of the week with a $1.75. We reached it today…and again, the rally has been strong, yet now from risk/reward perspective at least, we suggest taking profits

Short positions are worth keeping an eye on, and BHP has risen this week as the stock price has rallied. A couple of take outs here; The rally is not simply short covering, it’s legitimate buying which is encouraging (and not surprising given the massive global short on material stocks on 2015 – as we’ve spoken about recently) & 2 Scepticism is still about on the sustainability of this resource rally (given shorts have increased into strength). Ideally, we want to be seeing shorts capitulate (so short positions drop) in conjunction with an earnings upgrade cycle. If that happens, then we’ll get a sustainable recovery. For now though, these are simply trading opportunities in our view

Challenger Group Financial (CGF) delivered some good annuity sales numbers this morning for Q3 – booking $575m, up 29% on pcp. The Key was the lifetime annuity sales which accounted for 23% of sales in the quarter which has benefited strongly from move onto platforms – which has only happened in recent times (allows planners to sell the product + report on it easily….and charge for it!!)

This is a stock we’ve traded successfully in the past, and we like the story…regulatory tailwinds as the Govt promotes self-funded retirement, more retirees, more share market volatility + scars from the GFC. Right now there is $70bn going into retirement pa, consultants are now recommending 20% annuities, or $14bn….The total market is currently $3bn so pretty significant upside potential.

The issue with the stock, is it struggles in weak/volatile markets and is susceptible to bouts of weakness if bond markets take a turn. One to BUY on weakness rather than strength in our view…

….And finally Healthscope (HSO) which is approaching $2.80 (current $2.76) – our target area. We’re conscious of cash levels and we like the stock so we’ll play it as we see it BUT something we’re closely watching…

Stocks & Sectors Today

Source; Bloomberg

ASX 200 Movers

***What Matters Tonight***

European leads are HIGHER with the FUTURES on the FTSE +8, DAX +21 & CAC +11
DOW FUTURES are +10pts and S&P 500 FUTURES are up +1pt

S&P 500 is losing steam short term and had a night of indecision last night. A pullback from here seems likely.

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney, NSW 2000

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 21/04/2016. 4:15PM.
Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.
The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor. Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.
The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.
If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here