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Markets Live: Iron ore slump weighs

That’s it for Markets Live today.

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Here's today's wrap.



The Australian sharemarket has retreated from six-year highs, as a plunge in the iron ore price weighed on miners and several poorer-than-expected earnings results convinced investors to take a breather.

The benchmark S&P/ASX 200 slipped 10.7 points, or 0.2 per cent, to 5632.8, posting its first loss in eight sessions. The broader All Ordinaries inched 7.7 points, or 0.1 per cent, lower, to 5632.8.

Among the sectors, materials was the biggest drag, down 1.2 per cent, while financials slipped 0.2 per cent. The two global miners and all of the big four banks were down.

On Friday, iron ore plunged to a two-month low, falling 2 per cent to $US90.10 per tonne, its lowest point since June 18. Excess inventories and a glut of supply in the market have pressured the iron ore price for most of the year.

The big miners were hit, with BHP Billiton sliding 1.5 per cent to $37.25 and rival Rio Tinto losing 1.3 per cent to finish the day at $64.54. Fortescue Metals also fell, down 1.8 per cent to $4.34.

“That negative opening was reinforced by results in the earnings season, we’ve had BlueScope and UGL both delivering full-year numbers which were at the bottom end of market expectations. That has underwhelmed investors and they’ve reacted quite substantially,” Mr Sherwood said.

BlueScope Steel shares plummeted 12.8 per cent to $5.32 after the company failed to meet consensus analyst expectations for full-year profit. Australia’s biggest steelmaker reported a net loss of $82.4 million. While the result was an improvement on last year, the market had been expecting a better showing.


And here are the best and worst among the top 200 today.

Amcor packaging spin-off Orora has jumped 11.6 per cent today, proving once again that management destroy value in M&A, and then create it when they hive businesses off. That's why they get paid the big bucks!

Energy was the best performing sector today, and Buru and Caltex, the latter on earnings, are among the top names.

At the other end of the scale are big share price plunges in response to earnings updates from BlueScope Steel and Recall. A few iron ore miners are among the hardest hit, while Kathmandu falls 4.3 per cent after announcing its long-term CEO will step down later this long.

Best and worst performers in the ASX 200 today.
Best and worst performers in the ASX 200 today. 
asian markets

Japanese stocks have ended higher as investors welcomed the US dollar's rise following comments by Fed chief Janet Yellen at the Jackson Hole central bankers conference.

Here's how regional markets are doing:

  • Japan (Nikkei): +0.5%
  • Hong Kong: +0.4%
  • Shanghai: flat
  • Taiwan: +0.1%
  • Korea: +0.2%
  • ASX200: -0.2%
  • Singapore: +0.5%
  • New Zealand: +0.3%


Meanwhile, US futures are pointing to gains at the open of trade on Wall Street, with S&P futures up 0.4 per cent, potentially pushing the benchmark index above 2000 points for the first time.

market close

An 11 point fall in the ASX 200 has put an end to a seven-day winning streak for the benchmark index, as a falling iron ore price put pressure on miners and BlueScope Steel plunged 12.8 per cent on its earnings result.

The ASX 200 fell 0.2 per cent to close at 5634.9, while the All Ords finished 8 points, or 0.1 per cent, lower at 5632.8.

The iron ore price looks likely to fall below $US90/tonne when the benchmark price is set tonight in China, according to futures trading.

BHP closed 1.5 per cent down, Rio fell 1.3 per cent and Fortescue declined 1.8 per cent. Woollies fell 0.5 per cent.

The big four banks all fell, with ANZ the worst, dropping 0.8 per cent.

Energy was the best performing sector, up 1 per cent for the day, with Origin providing the most support as it climbed 3.3 per cent. Caltex jumped 7.4 per cent on its profit announcement, while Woodside was 0.2 per cent up.

AMP gained 1.2 per cent.

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Citi sees the biggest total return from European equities out to mid-2015, but favour Japanese and emerging market shares.
Citi sees the biggest total return from European equities out to mid-2015, but favour Japanese and emerging market shares. 

Citi have released their global asset allocation update, and they are keen on equities broadly, with European, Japanese and emerging market shares offering the best expected returns out to mid-2015.

They remain underweight corporate credit and government bonds. In the table below “IG credit” stands for investment grade corporate bonds, and “HY” for high yield, or junk bonds.

The investment bank believes earnings growth will be the key driver for sharemarkets from here, which is perhaps why they have an “underweight” stance on Australia, and the US – they expect less than 5 per cent from the S&P 500 index over the next 9 months or so.

Despite the top spot for the broad Stoxx 600 European index, they have a neutral stance on the region’s shares, presumably due to heightening growth risks within the region. They are neutral on the UK as well.

Within emerging markets equities, they favour China, Turkey and Taiwan.

Revenue was 2.3 per cent above the prospectus forecast at $2.62 million.
Revenue was 2.3 per cent above the prospectus forecast at $2.62 million.  Photo: Supplied

Spotless Group Holdings has capped its return to the ASX by just beating its prospectus revenue and profit forecasts.

The catering, cleaning and infrastructure group reported pro forma net profit of $106.6 million for the 12 months to June 30, beating its prospectus forecast by 3.1 per cent.

Revenue was 2.3 per cent above the prospectus forecast at $2.62 million. Statutory profit was 16.2 per cent ahead of forecast at $106.6 million.

The company has reaffirmed its prospectus forecast for statutory earnings of $134.5 million in the current financial year, ended June 2015.

Spotless directors intend to commence paying a dividend in the current financial year, and are targeting a payout ratio of between 65 per cent and 75 per cent of adjusted net profit after tax.

Spotless shares are 1.6 per cent higher at $1.91.


Chinese iron ore futures have dropped to their lowest since they were launched last year, while weaker buying interest pushed down prices for spot cargoes further on slower steel demand.

Benchmark spot iron ore is now trading close to this year's low of $US89 a tonne and a further decline would take it to its weakest since September 2012, as top, low-cost miners lift output even more in a bid to take out smaller producers.

The most-traded January iron ore contract on the Dalian Commodity Exchange is off 0.3 per cent at 644 yuan($US105) a tonne, after earlier touching 639 yuan, the lowest since the contract was launched in October.

That piles more pressure on spot prices which last week fell  3.5 per cent, the steepest decline since mid-June. Iron ore for immediate delivery to China slid 2 per cent to $US90.10 a tonne, its lowest since June 17.

"When the price drops this fast, Chinese mills tend to wait and see and buying activity could slow down. Supply is still huge and we see various offers from miners, big mills and traders," said an iron ore trader in Shanghai.

Big Chinese steel mills have been reselling excess cargoes from their long-term contracts with suppliers amid a global surplus that Goldman Sachs expects to hit 72 million tonnes this year and surge to 323 million tonnes in 2018.

A cargo of Australian Pilbara iron ore fines was sold at $US90 a tonne on the globalORE platform on Monday, according to the platform's website. That was down from Friday's $US91.50 per tonne for the sale of a similar grade at a tender, traders said.

‘‘Support at the $US90/tonne level looks reasonable, having bounced off that level in mid-June when port stocks were at record highs," ANZ said. 


The long-serving chief executive of outdoor clothing retailer Kathmandu, Peter Halkett, plans to step down two months after the company releases its 2014 results.

Halkett, who has been at the helm for eight years and oversaw the retailer’s transition from a private-equity owned company to a public company in 2009, plans to leave on November 25.

Kathmandu issued a profit warning in June, flagging a 10 to 15 per cent fall in full year earnings after warm winter weather crunched sales of outdoor clothing at its winter clearance sales.

However, earlier this month the company upgraded forecasts as temperatures cooled. It now expects earnings before interest and tax in the range of $62.5 million to $65.5 million, compared with $63.4 million in 2013.

Kathmandu has appointed chief operating officer Mark Todd as acting chief executive while it searches for a permanent successor. It gave no reason for Halkett’s departure, which came as a surprise to investors.

Shares are down 4.6 per cent to $2.88.

Peter Halkett is to leave outdoor retailer Kathmandu after eight years.
Peter Halkett is to leave outdoor retailer Kathmandu after eight years. Photo: Kate Geraghty

Moody's has downgraded the debt ratings of Western Australian to Aa1 from Aaa, in yet another sign of the ending mining boom.

‘‘The ratings downgrade reflects the state's ongoing deficit position, the deterioration in its debt metrics, and a growing risk that this trend may not be reversed soon,’’ the ratings agency said in a note this afternoon.

‘‘The challenges related to narrowing the budget gaps include greater volatility in the state's revenue base, reflecting its increasing reliance on royalty income, expenditure pressures related to the rapid expansion in the state's economy and population, and a weak policy response to the deteriorating financial and debt position.’’

These trends have led to persistent deficit results with the general government sector's budget gaps averaging 5 per cent of revenues from the 2008-09 financial year through 2012-13, Moody's said, adding that in 2013-14, the deficit is estimated to be equal to 6.2 per cent of revenues as current expenditures continue to outpace revenues.

Moody’s changed the outlook to stable from negative.

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The new bank hybrid securities, which have no fixed term and switch into shares at the worst possible times, would likely have fallen in value by more than 35 per cent during the global financial crisis, Christopher Joye writes in the AFR:

This is far removed from the popular claim they are super-safe “quasi cash” substitutes that should pay much lower returns than bank shares.

After publishing analysis that found Commonwealth Bank of Australia’s new $2.5 billion perpetual hybrid security Perls VII did not provide investors with sufficient compensation for its embedded equity risks, this columnist was inundated with feedback.

While many investors and advisers gushed, a frustrated institutional stockbroker had a different perspective. It is important to parse his arguments, because they form the bedrock of the sales pitch used to promote these securities.

“Ask yourself, with $500 billion of equity backing and [the Australian Prudential Regulation Authority] watching their every move, under what circumstances would bank hybrids ever be converted into equity?” the stockbroker wrote. “You will not be able to come up with a plausible answer.”

Actually, the CBA hybrids must legally convert into shares after 10 years if they are not called earlier by the bank, which happens. If they don’t convert because CBA’s share price is less than half its value on the date Perls VII were issued (one test), they stay perpetual. This means the bank never has to repay you a cent. A key distinction between debt and equity is a maturity date where the borrower repays what it owes. Equity instruments do not have one.

I am not the only sceptic. Morningstar’s credit analysts have published a report recommending “investors do not subscribe to Perls VII at these levels [because] the indicative pricing range is not attractive for the commensurate risks”. Morningstar suggested waiting for the return to improve by 0.5 percentage points (I proposed double that number).

On Sunday, the institutional newsletter Debt Capital Markets Review opined that Perls VII “come with all the downside of equity, but none of the upside”. The launch of these investments seemed “fitting in a week that the Reserve Bank of Australia governor told Parliament that ‘compensation for risk on financial instruments remains scant’.”

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shares down

A subdued profit outlook has weighed on Bluescope Steel’s share price with the company flagging December half earnings would be in line with the second half of 2013-14 the main reason for the downturn in its share price today.

‘‘The second half has traditionally been stronger than the first half,’’ the managing director Paul O’Malley said. ‘‘Therefore signalling the first half (of 2014-15) would equal the second half is a very good outcome.’’

Even so, hurting on the near term profit outlook is the softness in the iron ore price, which hits earnings of its New Zealand iron sands export business, while domestically, even though residential construction demand is firm O'Malley said engineering, construction and mining sector "is seeing some softness".

Bluescope's shares are off a heavy 13 per cent at $5.295.


A building boom in the inner Sydney apartment market is likely to peak in 2017 leaving the city with an oversupply of units, a new report has suggested.

As a result the value of both new and old apartments close to the city will fall 5 per cent in the two years to 2018, said its author Angie Zigomanis.

"Some people who own older apartments will experience a bigger decline," he said.

The report Inner Sydney Apartments 2014 to 2021 by BIS Shrapnel estimates that 5800 apartments are currently under construction in inner Sydney. Within the next three years developers are likely to deliver a total of 11,500 new apartments to satisfy demand from local and overseas investors.

Zigomanis, senior manager at BIS Shrapnel, said the Sydney market was playing "catch up" after a decade of weak demand for new apartments.

"However, the current surge in off-the-plan demand is likely to see the market get ahead of itself again as pre-sold new apartment projects commence and progressively work their way through to completion," he said.

According to Zigomanis after the last boom Pyrmont, the city and North Sydney "copped it the hardest".

This time however, "it will be the southern corridor (eg around Green Square) that will be affected because that is where the majority of apartments are being built," he said.

Here's more

A new report by BIS Shrapnel says the inner Sydney apartment market may be heading towards an oversupply.
A new report by BIS Shrapnel says the inner Sydney apartment market may be heading towards an oversupply. 

The Tax Office is cracking down on the black economy, targeting businesses that are not declaring cash revenues, from restaurants through to home cleaners, in a bid to bring billions of dollars back into the tax net.

The Tax Office told Fairfax Media it had stepped up audits of small businesses including cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building trades, road freight and waste skip operators.

Also in the ATO's sights are cleaners, who are almost always paid in cash for working in clients' homes.

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The recent results from iiNet confirm in the minds of Credit Suisse strategists Hasan Tevfik and Danien Boey that it is a stock that “should benefit from many of the dominant investment themes”.

Crucially, the internet services provider is “able to deliver robust growth in a low growth world,” they write.

The company has strong cash flow and should deliver double-digit dividend per share growth, they add, and the potential for further acquisitions could provide upside for the stock.

Even after rallying 14 per cent from its lows in July, it still trades on a estimated FY15 free-cash-flow (FCF) yield of more than 9 per cent, with “FCF margins rising into double-digit territory,” the strategists write.

“We know those companies operating on higher FCF margins are currently outperforming those on lower.”

All of that means iiNet is being added to the strategists’ model portfolio.

They make room by cutting their losses in Fortescue: “we have owned the stock since November last year and it has lost us 21 per cent (after dividends),” they ruefully note.

They continue: “Although Fortescue management have noted that credit investors like the company, it is clear equity investors do not.

“The company is cheap on our commodity price forecasts with a FCF yield of 9.4 per cent in FY15.

“But our economists forecast of further sluggish activity in China, compounded by weakness in the property market, suggests the stock price may be capped in the shorter term.”

Credit Suisse strategists fancy iiNet's growth prospects in a low growth world.
Credit Suisse strategists fancy iiNet's growth prospects in a low growth world. Photo: Louise Kennerley
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Beach Energy’s full-year profit has dropped 34 per cent despite a 51 per cent surge in revenues due to write-downs on the value of petroleum ventures in Egypt and a geothermal project in southern Australia.

Net profit for the year ended June slid to $101.8 million, some $52 million lower than the 2013 fiscal year, Beach reported on Monday.

UBS had been estimating full-year underlying net profit of $277 million, while Citigroup was estimating $276 million before Beach flagged the write-downs last Friday.

On Friday, Beach said it had written down its Egyptian exploration interests by $148.6 million, and had written off its Paralana geothermal project, which had a carrying value of $13.6 million.

Beach has already provided full-year guidance for fiscal 2015 production of 8.6 million-9.4 million barrels of oil equivalent, a 6 per cent decline from last year.

The company's shares are 0.7 per cent higher at $1.70 each.

shares up

Packaging manufacturer Orora, which was spun out of Amcor last December, reported a 44.8 per cent increase in net profit to $104.4 million in 2014 after slashing costs and gaining market share in glass bottles.

The result, which was underpinned by a 7.9 per cent increase in revenues to $3.18 billion, exceeded market consensus forecasts around $97 million.

Orora shares have popped 8.5 per cent to $1.60, easily their highest in the company's short history.

Pro forma EBIT rose 29.6 per cent to $192.1 million, beating market forecasts around $185 million, buoyed by cost savings of $27.1 million. Earnings in Australasia rose 26 per cent, fuelled by stronger volumes in glass and higher margins in fibre packaging, while earnings in North America rose 31 per cent.

Orora declared an unfranked final dividend of 3¢ a share, taking the full year pay out to 6¢, representing 70 per cent of earnings.

“We have delivered pro forma earnings growth of approximately 30 per cent by increasing sales revenue and continuing to successfully deliver on our cost reduction programs,” said managing director Nigel Garrard.

Mr Garrard forecast further earnings growth in 2015, Orora’s first full year as a stand-alone company.

Orora, formerly known as Australasian Packaging Distribution, had previously been one of the weakest performers in the Amcor portfolio, squeezed by import competition and rising costs.

However, analysts believe the $2 billion demerger has freed up the company to pursue profitable market share growth rather than growth at any cost.

The company is also benefiting from the opening of its new recycled paper mill at Botany and recent investments in efficiency and productivity. These programs have so far delivered cumulative cost reductions of $39 million, with another $54 million of cost savings expected to be realised in 2015.


Australian companies, wracked with fear, are stifling their growth by confining themselves to the domestic market, Goldman Sachs Asset Management’s head of Australian equities, Dion Hershan, says.

Hershan criticised investors, public company management teams and boards of directors for being obsessed with the fear of looking offshore for growth in a note he distributed to GSAM’s institutional clients, including industry and for profit superannuation funds.

“I happen to think companies have squandered an opportunity over the last few years; we’ve had elevated currency and open debt markets but there’s been little activity [exploring overseas expansion],” he said.

Hershan said some Australian companies with a track record in the Australian market have the ability to grow offshore but aren’t doing so because of a lack of confidence.

Food distribution companies in particular have an opportunity to pursuer growth by expanding into Asia, he said, adding that Australian retailers also have strong prospects for growth in other western developed markets.

“We are yet to see a controlled study that companies shouldn’t go offshore … there’s a risk associated with going offshore but I’d argue there’s as much of a risk in doing nothing,”  Hershan says.

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The costs of demerging from Brambles have curbed Recall Holdings’s inaugural full-year profit, but the information management business is confident it can accelerate future earnings growth.

For the year ended June 30, Recall reported a profit of $US42 million ($45.2 million), down 3 per cent on the previous year.

Demerged from Brambles and separately listed in December, the business had $US39 million in significant items. Barring these, Recall had a profit of $67.9 million, up 57 per cent from the previous year.

Recall will pay a dividend of 8¢ per share, unfranked, on October 23. The business will aim for a long-term dividend payout ratio of between 55 per cent and 70 per cent.

Recall is bullish about its growth prospects in the 2015 financial year; the company expects to deliver revenue growth in the high single digits.

“During our first financial year as a public company, Recall has established a platform for growth and made progress across each of our three strategic objectives: sustainable profitable growth, operational excellence and innovation for the future, which includes a truly differentiated digital strategy,” Recall chief executive Doug Pertz said.

Revenue surged over the year, from $US225.3 million to $US613.7. Organic revenue growth rose 3 per cent, while growth from acquisitions lifted 3.7 per cent.

Over the last 12 months, Recall fully acquired its Singapore business, CitiStorage in the US and two other small US and UK based companies.

Investors are unimpressed, selling the stock down 5.3 per cent to $4.85.


One of Australia’s top economic experts, Jeremy Lawson, says the housing market is 20 per cent to 30 per cent overvalued and has left Australia vulnerable to a big international economic shock.

Lawson is the global chief economist of Standard Life, a massive British fund manager with $460 billion in assets under management. He was previously a senior economist at the Reserve Bank of Australia and the OECD, and in 2007 advised then opposition leader Kevin Rudd.

In an interview with the AFR's Christopher Joye, Lawson criticised fiscal policy settings, suggested the RBA’s organisational culture was insular and said there was a bias towards big banks in the financial system inquiry panel and argued low interest rates are pushing house prices out-of-line with fundamentals.

As an economist focused on investing Standard Life’s capital around the world, Lawson said he can take a longer-term view than “sell-side” counterparts inside investment banks, who have to relentlessly promote new angles to clients and the media in a battle for attention.

Lawson said it is “reasonable to assume that future house prices will grow in line with real household disposable income as the commodity boom unwinds”.

“That would imply overvaluation of between 20 per cent and 30 per cent,” he said, based on a new valuation model released by the Reserve Bank in July.

House prices are 26 per cent above their peaks before the financial crisis and 11.2 per cent higher over the 12 months ended August 23, RP Data said. Prices in Sydney and Melbourne have surged over the last three months.

Lawson said valuation distortions have been fuelled by easy monetary policy and regulators’ reluctance to use so-called macro-prudential tools to slow price growth.

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Vulnerable to external shocks: Australia's housing market.
Vulnerable to external shocks: Australia's housing market. Photo: Louie Douvis
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