Stocks rock as 2018 unfolds
Bullish sentiment on equities has been reinforced by a strong start to the year, although the Australian sharemarket has underperformed amid a retreat by banks and bond proxies.
After a week marked by bond market jitters, both the S&P 500 and the MSCI World Index of Developed Markets were at record highs, while Australia’s S&P/ASX 200 index and benchmarks in Europe, Japan and emerging markets were slightly weaker.
Despite “stealth tapering” of bond-buying by the Bank of Japan, a supposed recommendation by Chinese officials to slow or halt US Treasury purchases (later dismissed as “fake news”), a renewed call by famed bond investor Bill Gross for a “bear market” in US Treasuries, and ECB minutes saying its “communication” about its preparedness to increase its asset purchases needed to “evolve gradually”, global equities were resilient overall.
The fact that Wall Street hit record highs despite multimonth highs in bond yields showed investors’ appetite to buy dips as macroeconomic data this year continued to reinforce the outlook for synchronised and robust global economic growth.
It was no wonder commodities were firm, with a four-month high in iron ore and a three-year high in oil.
But the energy sector was capped by downgrades from JPMorgan on Woodside and Origin as it remained cautious about crude oil prices because US shale oil producers are expected to increase production in response to higher prices. Diversified miners also dipped before soaring on the weekend.
Macquarie lifted its earnings forecasts for the diversified miners in response to higher spot prices, predicting that the earnings “upgrade cycle” will continue and flagging significant capital management in the form of share buybacks from the major diversified miners next month.
Citi saw a strong first half for
miners, with healthy commodity prices and capex discipline expected to boost cash flow, and cyclicals in general expected to be favoured amid rising government bond yields, synchronised global economic growth and a pick-up in corporate earnings.
Citi also detailed a number of “wildcards” for commodities, most of which would be bullish, but they warned of potential negatives like a slowdown in China’s economy and property market, a major escalation of US-China trade frictions, or a breakdown of the current oil production pact.
The bullish overall view for the diversified miners was also backed by Credit Suisse. It said that while valuations in the sector were “stretched”, earnings estimates were “conservative” particularly versus spot prices. But it was “cau- tious” about the potential for Aussie miners to splurge on takeovers.
“The opportunity cost of not completing deals will drive some decision-making in 2018, perhaps at the partial expense of shareholder value,” they said.
In contrast to its view on miners, Credit Suisse said it saw “relative value but little growth” potential in the major banks, the royal commission expected to drive ongoing news flow in the sector this year.
Bell Potter’s TS Lim also took the wind out of the banks, cutting CBA to hold as it was “priced for perfection” after a 5.5 per cent rise since he upgraded to buy in November.
In what may be a sign of things to come this year, the utilities, infrastructure and property stocks — known for their bond-like properties — were among the worst performers this week.
Australian property trusts should mostly underperform again this year, given the sector’s overweight exposure to potentially intensifying cyclical and structural retail headwinds, the prospect of changes to negative gearing, expensive valuations and the threat of rising bond yields, according to Citi.
But Goodman, Charter Hall and Lend Lease could outperform because operating conditions for fund managers and developers-ex retail are attractive, given a stable to improving macro environment and no clear catalyst for a reversal in asset values.
Office is the preferred sector exposure for Citi, as re-leasing spreads should continue to widen and supply remains constrained.
The US investment bank upgraded Dexus to buy, while cutting Stockland and Vicinity to neutral.
The retail sector was another underperformer this week, although analysts said their feedback from the holiday shopping season was positive despite concerns that the downgrade by Myer and the Australian launch of Amazon meant Christmas would be a disaster.
“Overall, the feedback was positive and in stark contrast to the weak conditions in late November, with almost every retailer we spoke to reporting solid sales growth over December,” Deutsche analyst Michael Simotas said.
He added that the consumer electronics and small appliances segments performed best but even apparel was solid. JB Hi-Fi performed strongly but Harvey Norman was solid, specialty retail outperformed department stores and David Jones beat Myer by a wide margin.
The Dow Jones Industrial Average closed at another record high yesterday