Australian Market Summary – 15 April 2016
So if you read this week’s remarks within the context of my utter despair last week, you’ll quickly realise just how bi-polar Australian shares have been of recent times.
The ASX200 is up 4% and where last week it was tedious and desperate, this week there has been a new-found enthusiasm for shares and commodity exposures in particular.
To be clear, little has changed.
This is simply part of the ebb and flow we have seen and will continue to see from a market in which there are precious few positive drivers.
However, as we made clear last week, a hefty dose of negativity had already been priced into major Australian shares so perhaps this week’s bounce was some deserving respite.
Commodities steal the limelight… again.
Miners rose 11% over the week, with Fortescue (FMG) and BHP (BHP) in particular leading the charge.
The major driver for the move continued to be the rising iron ore price and the increased optimism for steel prices globally.
It’s an interesting dynamic.
Since the turn of the year, Chinese hot-rolled coil (HRC) steel prices have risen 30%, in part down to re-stocking ahead of the construction season, but also due to concerted efforts made in China to purge the industry of excess capacity.
Ridding the industry of high-cost and pollutive capacity has been a positive, pushing steel prices higher and with that, the iron ore that goes into making steel.
Trouble is, when you reduce capacity you also purge demand for the commodity used to make the final goods.
For this reason, I think the rally in the mining shares will ultimately prove short-lived.
Secondly, I would also point out that Australian mining shares have actually been rallying from their February lows and are now nearly 40% from the bottom.
In fact, when compared against the banks, the major Australian miners have actually outperformed by 30% since February and the mining sector is actually back at levels relative to the banks last seen well over a year ago.
In other words, I am minded to think that in the coming week or two, we will likely look to sell down some mining shares on the basis that the outlook 6 and 12 months forward is still a cautionary one.
BHP (BHP) is likely to be the miner in the frame since much of BHP’s leverage comes from oil as much as iron-ore and analysts have been far less pessimistic in their assumptions on oil, meaning there is less room for BHP to ‘surprise’ on the upside.
With only a measly 2%-type dividend yield now and still significant debt on the balance sheet, we think its very hard to ascribe any real ‘expectation’ for BHP shares in 2016-2017. It is only ‘hope’.
Watch this space.
The Australian Dollar will shift the performance balance too …
Another reason why this miners rally will likely fade is the Australian Dollar.
With the US Federal Reserve making it clear they would be easy on the monetary tightening, the Australian Dollar has surged almost 10% against the greenback since early March.
The current rate of 77c would be making the RBA board desperately uncomfortable, particularly since much of the resilience of Australia’s domestic economy in the last 12 months can be attributed to the competitiveness gained from our weaker currency.
The RBA will be keen to ensure these benefits are not lost and for this reason I feel very strongly that an additional two rate cuts are in the offing locally, perhaps as soon as the first week of May.
This week yet another central bank (Singapore) was forced to ease domestic monetary policy, in effect to protect its local economy from the effects of global trends.
In time, Australia will prove no different.
A move to lower Australian interest rates will see market sentiment shift away from resources stocks and back to banking shares, domestic retail and even Telstra (TLS) given its significant dividend yield over falling cash rates.
In much the same way that we see the resources spike fading away in the coming weeks, any resultant spike in bank shares will more than likely fade in much the same way given medium-term issues surrounding the credit cycle and costs from increased regulation.
Sorry to be pessimistic, but its important we all understand broadly how we think things will play out over winter.
The week that was …
Oil remained in focus ahead of the weekend OPEC meeting in Doha.
Despite reports of a positive outcome, I think most seasoned oil watchers are expectant of some ebullient rhetoric suggesting an agreement to cap production, but that the real impact will be less.
That said, with expectations genuinely this low and with more reports in recent weeks speaking of the ongoing strength in oil demand, my gut feel would be to say that the bounce in oil still has further to run.
IOOF (IFL) had a successful investor day and the reports circling back seem to confirm what we knew about the excellent management and internal focus on recent deal integration.
The stock has risen 6% on the week, which is nice.
On the economic front, the March NAB Business Conditions index recorded its best figure since the GFC.
This is really encouraging stuff, but perversely this figure I expect will further encourage the RBA to cut local interest rates since much of the uptick in domestic business activity has come from currency weakness.
Employment figures were sound in March, but little for me to comment on.
The week or so ahead…
I just wanted to flag that I think in the coming week or two we will likely get active again on some portfolio changes.
The past few months have been quiet since there was little we felt particularly compelled to act upon.
Recent share prices in several names have now made things a little more interesting.
We look forward to talking to you all with some positive moves in the days and weeks ahead.
Have a great weekend.
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