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Australia's big four banks have led the local bourse close to six-year highs, but there is concern that valuations are looking stretched.
The benchmark S&P/ASX200 rose 15.5 points, or 0.3 per cent, to close at 5527.2, just 9 points shy of the six-year high it hit in late April. The broader All Ordinaries lifted 15.9 points, or 0.3 per cent, to 5506.7.
The big banks did most of the lifting for the modest gain on the index, with Commonwealth Bank of Australia rising above $82 for the first time, before pulling back to finish the day up 0.3 per cent at a new closing high of $81.94.
National Australia Bank rose 0.7 per cent to $33.51, Westpac gained 0.5 per cent to $34.50 and ANZ added 0.4 per cent to $33.69.
Perpetual head of investment market research Matthew Sherwood said the market was getting ahead of itself and companies will still need to justify earnings, come reporting season in August.
"It has been an impressive recovery but the market has been provided with very little support from earnings growth and this remains the rally's Achilles heel," Mr Sherwood said.
"At present investors remain addicted to the stimulus drug from central banks, who seem very content to feed the habit and are unconcerned about the state of global balance sheets."
Expectations of economic growth in Australia hit a near three-year low, as consumer confidence continues to trend downwards.
The Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months in the future slumped to its lowest point since late 2011.
A mind-blowing $US1 trillion ($1.07 trillion) of United States corporate cash lies trapped in foreign countries.
How to free it, put it to use or repay agitated shareholders, while avoiding the billions of dollars of taxes owed to the US government, is now a major headache for management and a top priority for boards.
First some background as to how $US1 trillion of US corporate cash, or around 60 per cent of the entire total US cash balance, has become stuck in tax-friendly jurisdictions like Ireland.
To take advantage of materially lower tax rates – Ireland's corporate tax rate is one third of that in the US – America's largest companies legally restructured their companies so the intellectual property, and therefore, the profits, flow to places with the lowest tax.
Cutting the tax bill by such a significant amount seemed like the right thing to do by shareholders, but it has become a major problem because the elaborate paper shuffle to cut taxes may be destroying rather than creating value for shareholders.
The problem is that ultimately this foreign cash will need repatriation, either to pay US expenses or to be returned to shareholders in the form of dividends or share-buy backs.
When that day comes, Uncle Sam will get his 35 per cent of the profits.
And here they are, the roosters and the feather dusters among the top 200 stocks today.
ALS is dividing analysts' opinions (see post at 12:22), but investors are voting with their money, pushing the lab testing services company up another 8 per cent today following yesterday's profits announcement.
Iluka is the next best performing name after its AGM today, while Bradken and Oz Minerals are two other stocks that have had some tough times but got some love today.
The worst performers were dominated by gold miners (see previous post), although McMillan Shakespeare suffered the second biggest fall after CEO Michael Kay has surprised the market by saying he will retire after six years at the helm, including perhaps the toughest period for the salary packager and car fleet manager.
Gold fell to a fresh three-month low in Asian trade today, extending an overnight plunge, as strong US economic data and concerns about Chinese demand blunted the precious metal’s appeal.
Spot gold slipped 0.3 per cent to $US1260.97 an ounce, its weakest since early February, after falling 2 per cent to $US1264.05 an ounce in New York trade on Tuesday.
Australian Bullion Company chief economist Jordan Eliseo said a combination of factors, including the Wall Street’s S&P500 index reaching a record high led to the sudden drop on Tuesday.
"We saw gold finally break out of its very narrow trading range to the downside, there was a series of better than expected US data overnight that would have contributed to that, as well as the fact that net gold imports to China were down somewhat, which lead to a bit of bearish sentiment," he said.
He said it was safe to say that when stocks were hitting all-time highs, the desire to hold on the portfolio insurance of precious metals would naturally decline.
ANZ commodities strategist Victor Thianpiriya said gold prices were due for a break, considering how the precious metal had traded over the past two months.
"Technically the price action was forming a wedge. We were in for a sharp move either way," he said.
"It's a bit of a mixed bag, the break on formation suggests the technical picture has become worse... what's going to be key is watching the response of the Chinese importers and consumers," he said.Back to top
China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.
The nations’s 10 largest lenders reported overdue loans reached 588 billion yuan ($US94 billion) at the end of 2013, a 21 per cent increase from a year earlier to the highest level since at least 2009. The rise in late payments portends more losses on soured loans for banks in coming months as China’s slowing economy crimps companies’ earnings, while a government crackdown on nonbank funding makes it tougher for borrowers to get new credit or finance older debt.
“Overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “While we believe Chinese banks’ credit woes will unfold gradually, the disturbing thing is that the end is nowhere in sight.”
Overdue loans, those late by at least a day, were 31 per cent greater for the banks as of December 31 than nonperforming ones, which are debts they don’t expect to recoup in full. That’s the biggest gap in at least five years, signalling lenders may be resisting acknowledging the deterioration to avoid setting aside funds to cover potential losses.
While nonperforming loans reported by China’s banking industry have increased for 10 straight quarters to the most since September 2008, they accounted for only 1.04 per cent of total loans as of the end of March, compared with the 4.83 per cent average of the previous decade, data from the China Banking Regulatory Commission show.
The benchmark index has closed above 5500 for the third consecutive day after flirting with fresh six-year highs, with the big four banks helping to consolidate on recent gains.
The ASX 200 and All Ords added 0.3 per cent, or 16 points, to 5527.2 and 5506.7, respectively.
Gains in the Big Four ranged between 0.3 per cent for CBA and 0.7 per cent for NAB, accounting for around half of the main index's net gains.
Insurers QBE (+2.6 per cent) and IAG (+1.5 per cent) both gained.
Woolies fell 1.2 per cent and Wesfarmers 0.6 per cent.
Newcrest dropped 4.2 per cent as the gold price fell, dragging down miners of the precious metals, which fell 3.6 per cent as a group.
The broader metals and mining sector reversed early losses to gain 0.3 per cent, with Iluka Resources the standout, up 6.1 per cent after its AGM in Perth.
Iron ore futures in Singapore have dropped nearly 2 per cent to the lowest since their launch last year, while prices in Dalian also dropped as plentiful supply overwhelmed the market.
Iron ore for delivery in July on the Singapore Exchange was down 1.9 per cent at $US96.20 a tonne, the lowest for the contract since SGX introduced iron ore futures in April last year.
At the Dalian Commodity Exchange, the most-traded September contract dropped 1.9 per cent to 706 yuan ($US110) a tonne.
"There's a lot of available supply and the key issue is mills are not in a rush to buy. They are keeping their inventory small and not buying a lot in advance," said an iron ore trader in Shanghai.
Iron ore for immediate delivery to China dropped half a per cent to $US98.10 a tonne overnight, as the volume of material on offer continued to weigh on prices.
The raw material broke through the $US100-support level on May 19 and has since stayed below that point, reaching a low of $US97.50 on May 20 - its weakest since September 2012.
It has been an impressive recovery but the market has been provided with very little support from earnings growth and this remains the rally's Achilles heel, Perpetual head of investment market research Matthew Sherwood says:
- Of the 25 largest markets in the world, valuations have accounted for the entire rise in 19 of them since June 2012 and more than half the rise in 21 of them. There will come a time when investors will demand to see the earnings delivery that has been absent in most markets other than in the US, Japan and Hong Kong.
- However, at present investors remain addicted to the stimulus drug from central banks, who seem very content to feed the habit and are unconcerned about the state of global balance sheets, which have even more leverage than was the case in 2007/08.
- As such, investors need to remain focused on strong balance sheets and quality operating models, which can deliver on expected earnings is what is still a sub-trend global and domestic growth environment.
Regional markets are generally higher today, after Wall Street indices touched new record highs, and amid the afore-mentioned speculation of a more accomodative policy stance by the People's Bank of China:
- Japan (Nikkei): +0.4%
- Hong Kong: +0.8%
- Shanghai: +0.2%
- Taiwan: +0.6%
- Korea: +0.7%
- ASX200: +0.4%
- Singapore: +0.05%
- New Zealand: +0.8%
‘‘We are seeing more and more evidence that Chinese growth is rebounding into the second half of the year,’’ says Nader Naeimi, head of dynamic asset allocation at AMP Capital Investors. ‘‘US data continues to get better.’’Back to top
China’s property market is very much on investors' radar, although most strategists feel the prospect of a property crash is still very low, IG’s Chris Weston notes:
- Local news today has speculated that we are likely to see a reserve ratio requirement (RRR) cut in certain regions and may also relax loan-to-deposit ratio limits. There are a number of statistics of late to show property is cooling in China, however since late February there has been a noticeable pick in accommodative language from the PBOC.
- It seems the government is happy to lean fairly heavily on the central bank to manage the transition that is occurring in the world second largest economy. It’s worth bearing in mind that domestically the cooling is not so much driven by tight central bank policy as it has been historically. On the contrary; policy has been prudent, but not tight for over a year. It seems more structural and playing back into traditional supply/demand imbalances.
- Property isn’t the default investment class of choice anymore, with wealth management products taking that spot, while many simply feel there are better opportunities elsewhere. The cooling property sector is a concern, but it’s worth bearing in mind that domestic balance sheets are in good shape and the PBOC can ease policy fairly rapidly, while continuing to encourage domestic banks to extend credit.
Bit of a mid-afternoon chart-fest; here's one from Suncorp which highlights how the Aussie dollar has a delayed reaction to the RBA's commodity price index.
"May’s commodity price index will be released on the 2nd of June," writes Suncorp financial markets analyst, Jordan Karlos. "Given the recent slump in iron ore and coal it may slide further suggesting the AUD may soon follow."
The Senate Inquiry into ASIC has slammed the Commonwealth Bank for providing “sketchy” information and failing to keep it and the corporate regulator fully informed about compensation for victims of its financial planning scandal.
Chairman Mark Bishop said new information received from the corporate regulator and CBA was “sketchy” and left many key questions about the scandal unanswered.
This included the number of clients affected by poor financial advice from some of the bank’s planners who had not been told of their loss or offered financial help to assess their claim.
Senator Bishop also tabled a letter from the bank that corrects earlier evidence to the Senate inquiry. Contrary to its earlier submissions and public statements the bank admitted it had not offered all victims of its Commonwealth Financial Planning and Financial Wisdom arms $5000 to pay for an independent adviser to help assess offers of compensation.
It also admitted that not written to all victims of CFP with offers of compensation as previously claimed.
Iam alarmed ASIC says over 4000 clients affected by inconsistent approach CBA applied to compensation measures Maybe ten of thousands 5/6— Senator Mark Bishop (@senatormbishop) May 28, 2014
A nice chart from Barclays showing that the value of mining projects under way continues to fall sharply as work on major projects starts to draw to a close, based on Bureau of Resources and Energy Economics data released today (see also post at 11:59).
The value of committed projects continues to fall, summarise the Barclays economists, dropping from $240bn (15% of GDP) at the end of last year to $229bn (14%) now. This compares with the peak of %268bn (18%) reached in 2012.
With no new mega-projects under way, the bureau has forecast that the value of committed projects will decline to about $210bn (13%) by end-2014, falling to about $130bn (8%) by end-2015 and hitting $70bn (4%) by end-2016.
The bulls are firmly in control today, driving the share market not only to its highest in 2014 but also in six years.
Big banks are leading the gains as investors chase yield yet again, with CBA topping $82 for the first time, up 0.5 per cent. ANZ is up 0.7 per cent, NAB and Westpac have gained 0.8 per cent.Back to top
Fairfax Media is cheap on a cash-flow basis, but strategists at Credit Suisse are happy to take profits now given the outlook for the company’s core business remains “uncertain”.
In its place, in their model portfolio the analysts add the “out of favour” Myer.
“It has suffered as consumer confidence has weakened and the company has struggled to grow sales,” the strategists write in a note to clients. “Earnings trends remain poor which is always a sign of an unloved company among the momentum-focused active investor base in Australia.”
The department store owner is just too cheap to ignore – the broker points to a double-digit gross dividend and free-cash-flow yields. The company trades on a 40–50 per cent P/E discount to the global sector average, they add.
“Also, we don't discount the possibility of the company benefiting from M&A activity,” the strategists write.
In terms of their overall strategy, the broker’s analysts are focusing on four themes:
- Restructuring: Rio Tinto, NAB, Fortescue, Caltex, Seek and CSR
- Efficient free cash generators: Sonic Healthcare, Flight Centre, and Seek
- Housing demand: CSR, Mirvac
- Dividend yield: Telstra, Suncorp, Sonic Healthcare, Mirvac, and Myer
The strategists’ short ideas are: Santos, Crown, Ramsay Health Care, ASX, Bank of Queensland, and Metcash.
Here's one that's stirring the pot higher up on the website: despite surging house prices, housing affordability has apparently risen to its most favourable level in 12 years in the first quarter of this year, thanks to record low interest rates, at least that's what an HIA-CBA measure claims.
The HIA-CBA Housing Affordability Index improved by 2.1 per cent in the March quarter and chalked up a 10.8 per cent annual rise.
The index measures a wide range of factors of which house prices are only one. The other major factors are interest rates and incomes.
"Increases in home prices over the past year have been significant," says HIA economist Shane Garrett. "However, the impact of lower interest rates and continued earnings growth has ensured that home purchase affordability has improved over the past year for existing home-owners and those on the cusp of entering the market in the short term.
"We're talking about house purchase here, and at the moment it's easier to purchase."
Even a real estate agent is doubtful about the findings.
"Affordable in our market? Not really," McGrath's Jonathan Viewey says.
"It’s tough out there at the moment, whenever something decent comes up there is a lot of competition."
Australian Agricultural Company chief executive Jason Strong said the cattle company has secured supply agreements for its $91 million Darwin abattoir ahead of the mammoth facility’s scheduled opening in September.
The nation’s largest beef producer this morning said its statutory after-tax loss for the year ended March 31 narrowed to $40 million from the year-earlier $49.8 million loss.
AACo, which is Australia’s oldest company, has struggled with fierce drought conditions across the Northern Territory and Queensland where its seven million hectares of cattle stations are.
The company has been building its massive meatworks at Livingstone, 50 kilometres south of Darwin, and conducted a $299 million capital raising last year to help shore up its stretched balance sheet and fund the project.
Mr Strong said the facility is about opening new offshore markets for the company and insulating AACo from volatility in the domestic beef market.
There have been concerns that the abattoir, which requires large volumes of cattle to be efficient, would not have security of supply at reasonable prices given AACo does not have enough cattle to do it alone.
But Mr Strong said on Wednesday that AACo has reached agreements with other beef producers in the region to supply the facility through to March 2015.
“We have secured them now so we’ll have no need to be in the spot market and we don’t intend to operate in the spot market. It has given us some confidence in our plans to set up multiple sources of supply over time,” he said.
The Australian dollar has remained steady despite the release of stronger than expected construction figures.
The local currency is trading at 92.59 US cents, flat from its Tuesday's close.
Construction work rose 0.3 per cent in the March quarter, after a 1.1 per fall in the December quarter, the Australian Bureau of Statistics said.
The figure was better than the 0.8 per cent fall economists were expecting and the report also showed a strong pickup in residential construction.
That should have boosted the Australian dollar but the data had no impact on the currency, Westpac senior currency strategist Sean Callow said.
"There was no reaction to the construction numbers which was disappointing because they were very good," Mr Callow said.
"They're an input to gross domestic product, there was a huge rise in residential construction so some very good signs on the housing market.
"But there are some releases that the Aussie dollar just refuses to pay attention to and the construction survey is one of those."
Capital expenditure figures being released by the ABS on Thursday, however, could affect the currency, Mr Callow said.
Rio Tinto’s new Australian boss says the nation has reached a crossroads, and will slide into obscurity unless serious structural reforms are made.
Speaking in Canberra today, Phil Edmands said the much-discussed need to improve productivity in Australia would not be achieved without reform of workplace laws.
‘‘There is no way to achieve increased productivity without changes that affect the way we employ and deploy labour. Avoiding these changes is a fool’s paradise,’’ he said.
‘‘Without them ultimately we will not preserve jobs, we will lose them, because we will not grow the economic pie, we will shrink it.’’
Similar concerns with the Fair Work Act, which was created by the Labor government in 2009, have been expressed publically by other mining companies including BHP Billiton.Back to top