Business

Markets Live: Pre-budget freeze

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Here's the evening wrap.

Best and worst performers among the top 200 today:

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market close

The sharemarket has closed slightly lower as investors remain on stand-by ahead of tomorrow's federal budget.

The S&P/ASX200 index slipped 12.4 points, or 0.2 per cent, to 5448.8, while the broader All Ords lost 13.0 points, or 0.2 per cent, to 5429.0.

Among the sectors, materials shed 0.5 per cent, financials slipped 0.2 per cent while industrials added 0.4 per cent.

shares up

Indian shares have surged to a record high and the rupee rallied to its strongest in 10 months on rising hopes that exit polls would show Bharatiya Janata Party and its allies winning a majority in the current elections.

A win for a BJP-led coalition is widely seen as setting the stage for a revival in confidence, investment and growth as Asia's third-largest economy steers through a rough patch. Actual results for India's five-week long elections are out on Friday.

BJP and its National Democratic Alliance would need to win 273 seats in the 545-seat parliament to clinch the most seats in India's lower house, but analysts say even a number close to that would be seen as enough to lead to a stable government.

India's NSE index has surged 17 per cent since Narendra Modi became the BJP candidate on September 13, as the opposition party is perceived by markets as being more business friendly at a time when the economy is growing at its slowest pace in a decade.

UR Bhat, managing director, Dalton Capital Advisors, who advises foreign investors, says domestic-oriented shares could gain on expectations the BJP will be able to revive investments and spark a broader economic recovery.

"Infrastructure, engineering, cement, power and industrial stocks should gain if a Modi-led government comes to power," says Bhat. "One should take exit polls with a pinch of salt, but people will latch on to them as they are the only information available ahead of actual results.

The broader NSE index has gained as much as 1.7 per cent to a record high of 6975.70 points, surpassing its previous record high of 6871.35 points.

Meanwhile, the rupee strengthened to as much as 59.51 per US dollar, its strongest level since July 29, 2013 from its close of 60.02/03 on Friday. At these levels, the currency is up around 16 per cent from the record low of 68.85 hit in late August, when Indian markets were gripped by its worst market turmoil since the balance of payment crisis in 1991.

Narendra Modi is on the cusp of presidential power.
Narendra Modi is on the cusp of presidential power. Photo: Reuters
world news

Russians ditched the rouble in March at the fastest pace in more than four years, official data shows, as the currency was hit by fallout from the worst stand-off with the West since the Cold War over Ukraine.

Central Bank data showed late last week that the total demand for foreign currency, chiefly the US dollar and the euro, reached $US14.9 billion in March, the highest since January 2009, the aftermath of the global financial crisis.

Demand was 1.5 times higher than in February, and came as President Vladimir Putin said in early March he had the right to invade Ukraine to defend Russian speakers there. He then annexed Crimea, spurring condemnation and sanctions from the West.

Russians also rushed to take foreign cash out of their banks at a record-high pace, the bank said, withdrawing a total of $US6.9 billion, nearly half of that from their dollar accounts.

The rouble lost nearly 9 per cent in the first three months of the year against the dollar and a bit more than 8 per cent against the euro, with most the fall registered in March.

The Russian currency has recouped some of its losses since, but the population's switch to foreign currencies deals a blow to the central bank, which had gradually tried to establish the rouble as a trustworthy currency.

The rouble closed at 35.04 against the US dollar on Thursday before a long holiday weekend in Russia and at 48.53 versus the euro.

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shares up

Shares in Samsung Electronics have jumped more than 4 per cent, their biggest daily gain since August, after the hospitalisation of the company's chairman for a heart attack spurred speculation it would soon undergo a restructuring.

"In the awake of chairman Lee's hospitalisation, investors are hoping for a massive restructuring within the group. Expectations are running high for Samsung Electronics to be the focal point in the restructuring," says S.R. Kwon, an IT analyst at Dongbu Securities.

Lee Kun-hee, the chairman of Samsung Electronics, the flagship of South Korea's biggest conglomerate, underwent a cardiac procedure on Sunday after suffering breathing difficulties and a heart attack. He is in recovery now, the hospital said today.

Shares in Samsung are up 4.1 per cent to an almost two-week high, outperforming a 0.5 per cent gain in the broader market

Hospitalised: Samsung Electronics Chairman Lee Kun-hee.
Hospitalised: Samsung Electronics Chairman Lee Kun-hee. Photo: Reuters
forecast

Not everyone is as optimistic for equities as Standard Life's Guy Stern (see blog post at 2.34pm): if you’re looking at putting money into the sharemarket, then maybe think again, says one of the local market’s savviest investors, Geoff Wilson’s WAM Capital, a listed investment company.

In its latest monthly report to investors, it reckons the sharemarket is fully priced, with the ‘‘price to equity ratios of stocks across various industries trading significantly higher than their historical averages’’.

As a result, the sharemarket is likely to remain ‘‘flat’’ until at least year end, with a ‘‘cautious stance’’ towards Australian equities. It remains ‘‘more optimistic’’ on the market’s outlook for the ‘‘medium to longer term’’, it said.

Underlining WAM's cautious stance, the portfolio has a cash holding of 41.2 per cent, leaving it "well positioned to seize on opportunities in the market when they arise."

quote

Big Mo is investors’ guilty little secret. You can rely on momentum. But it makes many people feel uncomfortable, the FT's John Authers writes:

It is some two decades since academics nailed down a momentum effect in stock markets. Easily confused with trend following – the tendency for markets to keep going in a particular direction – it refers to the propensity for relative winning stocks to keep winning, and losing stocks to keep losing.

Every so often, momentum reverses. In the past weeks, internet and biotech stocks, after a riotous run, have been clipped back significantly, even as the US stock market remains at record highs.

But when investors set up mechanistic momentum strategies, which hold the winners over a recent period (usually the last six months or the last year) and sell short the losers, and keep rebalancing, they reliably make money. Academics have documented a momentum effect across the world, and in time periods going back two centuries. In the present, hedge funds use it to make money.

This is discomfiting. Momentum has nothing to do with the fundamentals of a company, and much more to do with the human propensity to extrapolate the flimsiest trends into the future. It feels wrong that money can be made this way.

Here's the whole yarn ($)

iron

Strike action could cripple Port Hedland within 30 days, after some tugboat workers aligned to the Maritime Union of Australia took a major step toward industrial action today.

Deckhands on the tugs have been campaigning for better conditions over the past two months, and a ballot of the workers has today approved that strike action can take place at a later time if deemed necessary.

The ballot result will not immediately lead to a strike, but it suggests that interruptions at one of the nation's most economically important ports are becoming more likely unless North American shipping company Teekay can salvage a compromise with the workers.

Port Hedland is the exit point for the vast majority of Australia's iron ore, with BHP Billiton, Fortescue Metals Group and Atlas Iron said to be the most affected if a strike occurs.
Iron ore remains Australia's most lucrative export commodity, and Port Hedland exports about $100 million of it every day.

The major benefactor of a strike could be Rio Tinto, which exports through its own Pilbara port - Cape Lambert - just south of Port Hedland.

The major loser could be Fortescue Metals Group, which is needing to run at "sprint capacity" for the entire June quarter to meet its full year iron ore export guidance.

Read more

Port Hedland is Australia's busiest port, exporting about $100 million worth of iron ore every day.
Port Hedland is Australia's busiest port, exporting about $100 million worth of iron ore every day. Photo: Jacky Ghossein
politics

Here's an overview of what we know so far about the Abbott government's first budget:

Taxes

  • Deficit levy of 2% on incomes of $180,000 or more
  • Reintroduce indexation of the fuel tax excise, adding between 2.5¢ and 3¢ to the price of petrol
  • 1.5% reduction of the company tax rate, to 28.5%, to begin in July 2015

Welfare

  • Raising of pension age to 70, affecting people born after 1965
  • Linking the disability support payment to inflation rather than wages growth
  • Regular reviews of disability payment and age pension recipients’ eligibility
  • Reintroduction of work-for-the-dole scheme
  • Ending of income support bonus paid twice a year to welfare recipients

Health

  • Medicare fee on GP visits, of between $7 and $15
  • Commitment to National Disability Insurance Scheme

Education

  • Continuing former government’s Gonski funding over four years before shifting to a new model
  • Some form of de-regulation of university fees, allowing providers to charge more for courses
  • Extension of government funding to private colleges and TAFEs

Families

  • Tighter eligibility for family tax benefits with $100,000 means test
  • Paid Parental Leave scheme, now a maximum payment of $50,000 for mothers earning $100,000
  • Abolition of Schoolkids bonus

Public service

  • 16,000 federal government jobs to be slashed as more than 70 government bodies are amalgamated, abolished, or privatised, including the Royal Australian Mint, Hearing Australia and several tribunals
  • 3000 jobs to go at the Australian Taxation Office
  • New Australian Border Force to combine customs and immigration

ABC

  • National broadcaster to face a 2.25% efficiency dividend
  • Scrapping of Australia Network, currently run by the ABC under a 10-year, $233 million contract

Environment

  • $1.55 billion over three years for the Emissions Reduction Fund, part of government’s Direct Action climate change policy
  • Axing of National Water Commission and Australian Renewable Energy Agency

Superannuation

  • Abolition of government contribution to superannuation funds of those earning $37,000 or less

Infrastructure

  • $10 billion infrastructure package including spending on major projects and encouraging privatisation of state assets
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analysis

Global share prices may be expensive, with price/earnings ratios at nosebleeding levels, but that won't necessarily mean the market will crash, says Guy Stern, head of macro investing at Standard Life Investments

Stern, who oversees £77 billion ($138 billion) of client funds says he's confident global equities will deliver positive returns for the next few years.

His comments come after legendary Swiss investor Marc Faber said last month that market valuations were in ''cuckoo land'', setting the stage for a crash of apocalyptic proportions.

But Stern says he has difficulty reaching the same conclusion:

  • If we take a look at macroeconomic events, we have just gone through a period of strengthening the financial system, so a big breakdown of what you saw in the financial system, a la what you saw in 2008 doesn't seem very likely.
  • There are always possibilities for big market corrections but I can't see right now see any specific driver for that.
  • The US didn't really accelerate. What it did was become very certain in generating 2+ per cent GDP growth. The UK followed suit and China really did generate its 7+ per cent growth, and even Europe came out of recession. There was a greater level of certainty which probably pushed up the valuations.
  • To say equities are full valued, that's probably true. Looking at PE ratios and all the standard metrics, nothing is looking extraordinarily cheap right now, I think that's fair.
  • But you need a catalyst for investors to turn their backs on risky assets or embedded risk premium and I'm having a hard time coming to a firm conclusion that that's something that needs to happen or what would drive that.

 

Stern says the main risks, including a dysfunctional US Congress, a credit crisis in Europe and the middle east's Arab spring, are no ''better or worse today than in the past few years''.

Maybe some temporary relief for the iron ore price:

shares up

Childcare operator G8 Education is tracking as the session's best-performing stock in the ASX200.

Shares in G8 are 4.7 per cent higher at $4.42 after the group revealed this morning that it has collected $150 million in an oversubscribed debt raising to help finance the acquistion of more centres.

The offer, which was priced in Singapore dollars, raised $SGD175 million ($150 million), at a 4.75 per cent per annum coupon for a three year term, maturing in May 2017.

The money raised will help G8 Education complete its plan to acquire 154 childcare centres by September. As at April 29, 64 of these contracts were settled with an additional 97 transactions left to be settled in the coming five months.

asian markets

Time for a quick look around the region, which shows Chinese markets are doing particularly well today:

  • Japan (Nikkei): -0.2%
  • Hong Kong: +1.7%
  • Shanghai: +1.9%
  • Taiwan: -0.65%
  • Korea: +0.4%
  • ASX200: -0.4%
  • Singapore: -0.6%
  • New Zealand: +0.2%

China on Friday said it will relax limits on foreign investment in listed companies, expand the quotas for capital flow and develop commodities trading tools.

‘‘The announcement is good for the market in the medium and long term and raises the government’s attention to the stock market to the state level,’’ says Wu Kan, a fund manager at Shanghai-based Dragon Life Insurance. ‘‘This will boost the confidence of the market.’’

oil

Oil prices are on the brink of possibly their biggest correction since the global financial crisis after Vladimir Putin's gamble to use Russia's crude as a political weapon backfired spectacularly on the Kremlin, an economist predicts.

The mere suspicion among oil and gas traders that Putin could turn off the taps on the thousands of kilometres of pipelines that snake their way from fields in Siberia's steppe to export terminals and urban consumers in Europe – in retaliation for economic sanctions imposed by the US and Brussels – had been enough to keep energy markets artificially frothy.

But Ole Hansen, head of commodity strategy at Saxo Bank, has now made the bold call that about $US25 could be slashed off the price of a barrel of crude if the US government were to open its huge stockpiles of oil stored in the nation's Strategic Petroleum Reserve (SPR).

The reserve, which is held in huge tank farms across America, now contains 700 million barrels of crude, enough to meet the entire world's oil consumption for almost eight days. According to Hansen, most of it was accumulated at an average cost of about $US30 per barrel – a significant discount to current prices.

Aside from making a big profit, releasing oil from the SPR would be one of the American government's most effective strategies to nullify Putin's "energy weapon" and humble the Russian economy further.

The Department of Energy gave traders a small taste of the SPR's potential in March, when it unexpectedly placed 5 million barrels on the market. The release was a rare move that many experts interpreted as a tacit warning to the Kremlin to keep its oil and gas flowing as it annexed Crimea.

At the same time, Hansen points out, US domestic crude inventories are surging. According to the latest figures available from the US Energy Information Administration, America was producing 8.3 million barrels per day (bpd) of crude last month, the highest level achieved since 1988.

At this rate, the US government will soon have no alternative – irrespective of the situation with Russia – but to lift its ban that was first introduced in 1979 on domestic exports of oil.

Read more

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china

As China’s President Xi Jinping warns that slower growth is the ‘new normal’ in the world’s second largest economy (see post at 9.13am), Johanna Chua, Citigroup’s head of Asia-Pacific economic and market analysis, says the market is too focused on China’s pace of growth and its debt levels, disregarding critical reforms that will have greater relevance over the long term.

Chua acknowledges there are serious concerns around borrowing levels within the world’s second-biggest economy, but also sees critical differences with previous debt crises in the United States and Iceland that suggest China is better placed to avert any potential shock:

  • With the experience of the subprime crisis, we’re so fixated on leverage. Here is a country in the last five years that has leveraged a lot ... That is the obsession of China which will probably not go away any time soon.
  • You cannot draw simple analogies that what happened to the US will happen to China, or what happened to emerging markets will happen to China.

China’s borrowing has not been financed externally, implying that it is not vulnerable to sudden capital outflows of foreign funds.

“Most countries at the peak of their credit booms they have already been financing their credit booms through foreign capital ... when you have a loss of confidence as a foreign investor, you have a sudden stop of capital flows that can be a massive trigger for [a credit shock],” Chua says. In China, debt is mostly funded through the domestic financial system.

She also highlighted that authorities could relax lending conditions if there were a sudden rush of corporate defaults.

So far only one Chinese default has made headlines: the failure of solar company Shanghai Chaori Solar Energy Science & Technology to meet its obligations to bond holders. At the time, one economist likened this event to a “Bear Stearns moment” for China but it has so far failed to spark any flow-on consequences.

analysis

The investment community could be underestimating the size of the tailwind forming beneath equities as money is rolled out of term deposits and into higher-returning asset classes, leading to a re-rating of listed financial services companies.

Pengana Capital’s funds manager Ed Prendergast is betting the models used by investment analysts to predict future earnings growth are currently underestimating the shift of capital he expects to take place over the next three years.

Prendergast says when combined with a reasonable, albeit positive, assumption of 8 per cent compound growth in equity markets over the period, it’s possible to build a scenario where earnings among a group of financial services stocks leveraged to Australians’ wealth and investment management needs could be 50 per cent to 70 per cent higher than is currently forecast.

“These are not wild assumptions,” says Prendergast of his basis for tilting Pengana’s Emerging Companies Fund towards non-bank financial stocks.

He says the sector is positioned to benefit from the healing of the scars from the global financial crisis as investors look to take more risk and turn back to the equities market.

The group of stocks Prendergast has built positions in and now account for more than 17 per cent of the fund’s overall portfolio include IOOF, Perpetual, SFG Australia, Magellan Financial Group, Treasury Group, Platinum and Charter Hall.

Read more

forecast

NAB is no longer expecting a rate cut in 2014, aligning its rates outlook with the other big four banks.

The bank's economists explain the change of tack:

  • Reasons are 1) the economy has been better than we expected and 2) the RBA have made it plain they are reluctant to cut what they already think  is a super low cash rate.
  • The economy still faces headwinds, including a tighter fiscal stance which we learn more about in tomorrow evening’s Commonwealth Budget.
  • Even so, it will take something extraordinary for the RBA to cut again and we are not forecasting that. We now expect the cash rate to be  unchanged at 2.5% until Q4 2015, when it will start to rise.


NAB also upgraded its GDP growth forecast modestly and now expects GDP growth at 2.9 per cent in 2013/14 (was 2.7 per cent) and 3.1 per cent in 2014/15 (was 3.0 per cent).

"Most of this improvement reflects a stronger net exports contribution – particularly in Q1," NAB says. "Even so, the growth upgrade and stronger labour market in recent months has allowed us to revise down the expected peak in the unemployment rate to 6.25 per cent in late 2014 (previously 6.5 per cent)."

ANZ and Westpac expect rates to remain unchanged this year, before slowly edging higher in 2015, while CBA is tipping a hike in the fourth quarter.

Among the big investment banks, Goldman Sachs, JPMorgan and Macquarie are still predicting one more rate cut in 2014.

earnings
Bullish on Bell: Charlie Aitken
Bullish on Bell: Charlie Aitken 

Bell Financial Group director Charlie Aitken has topped up his stake in the broker by buying almost 150,000 shares in Bell between May 6 - 8.

The perma-bull's outlay was $89,110 which increases his share of the company to 4,894,000 shares, valued at $2.94 million at today's share price.

He also has 300,000 unlisted options. Aitken was in the market buying as recently as April 29 having joined the board in March this year.

"I think we are undervalued," he told The Australian Financial Review's Rear Window last week.

budget

How much growth will Joe Hockey's deficit focus knock out of the economy in the 2014-15 financial year?

According to AMP Capital's investment strategy head and chief economist, 0.3 per cent.

With the Reserve Bank predicting sub-trend economic growth of 2.75 per cent based on existing fiscal tightening, that would take the nation back to the rising unemployment and dull business conditions prior to the federal election.

If the twin forecasts by the RBA and AMP's Shane Oliver are correct, the danger is that wobbling business confidence will take a hit and the country won't get the investment it needs to offset the fall off in resources construction. That would put further pressure on the RBA to "do something" when the housing market is already running hot.

Shane Oliver summed it up the budget threat nicely in his weekly economic update:

  • Our concern is that the government has exaggerated the budget problem – it's a problem, but far from an emergency - and that this combined with the political cycle, which argues in favour of getting the budget pain over with early, will result in the government going too hard in terms of the fiscal austerity.
  • The OECD has rightly warned Australia that 'heavy front loading of fiscal consolidation should be avoided'.
  • Right now the economy is still a bit fragile with only tentative signs of improvement in the non-mining economy. But this could be snuffed out if the budget is too tough. The key is to put policies in place that bring long term spending growth under control, as opposed to adopting too much austerity in the short term. Hopefully this will be the case.
Promises going up in smoke ... 'From the Gallery' by David Rowe
Promises going up in smoke ... 'From the Gallery' by David Rowe 
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