Stocks rock as 2018 un­folds

The Weekend Australian - - BUSINESS REVIEW - DAVID ROGERS

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

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