ASX at the close

by Angus Nicholson for Chris Weston, IG

Chinese markets

Japanese markets have been the standout performer in Asia today, seeing a record daily rise off the back of plans to cut corporate tax rates.

Having said that, the methods by which theShanghai Composite (SHCOMP) is rising are somewhat concerning. Volumes in China’s futures markets have fallen dramatically since their reopening after the holiday for the World War II commemoration. A range of new restrictions from increased margin requirements to limits on high frequency trading (HFT) have served to throttle liquidity in the Chinese futures market.

The futures markets were previously free of some of the restrictions of China’s cash markets, such as being able to buy and sell a stock on the same day. In this way, despite having a far smaller pool of investors, it provided key signals to trading in the cash markets.

This apparently marked the Chinese futures markets as a source of volatility to be quelled. It appears China has taken a ‘Sophie’s Choice’ and decided that the futures markets must be killed in order for the cash markets to live. This appears to also be supported by some judicious buying to support the markets as well. The late session surge yesterday was driven by the large cap ‘Red Chips,’ a fairly strong indication of government buying.

This flip-flop of policies regarding support for the Chinese stock market surely has only served to further damage investor confidence in the markets, quite apart from the exact level it is trading at. It is difficult to know how this will play out going forward, or how long the government expects to continue these policies. But it is difficult to be confident of any upturn in the Shanghai Composite until it takes another trip down to at least the 2850 level.

Moves on the SHCOMP have been supported by the MoF’s statement to urge the implementation of fiscal policy. The construction and materials sector has been the best performing on the index, up 3.1%, with a number of companies perceived to benefit from increased fiscal spending trading up 10% – the inter-day limit.

Fresh fiscal stimulus is not the issue facing China in 2H, it is getting their already-promised fiscal spending targets delivered. Banks and provinces have been reticent to spend as borrowing costs have risen and credit has been difficult to come by. The main issue has been moving previously-issued local government financing vehicle (LGFV) debt onto the government’s balance sheet through the issuance of provincial bonds.

Banks baulked at the low yields on offer in the newly issued debt, and had to be forced by the government to buy them. This process has sucked up a lot of liquidity and made banks and provinces less inclined to spend. Direct intervention by the MoF and other government ministries is likely the only way to get fiscal funds flowing and meet this year’s targets.

 

Japan

The Japanese market has seen an impressive 5.7% rally today, its strongest one day performance since 2008. Prime Minister Shinzo Abe announced plans for dramatic cuts to corporate tax rates. He stated that he planned to initially cut the current corporate tax rate of 35% by 3.3%, and push it down into the twenties over several years until it reaches as level that compares favourably  in the international context.

The market was no doubt buoyed by this news alongside renewed Chinese stock market support and fiscal spending, as well as further weakness in the Yen. However, the Nikkei 225 was also partly just very oversold and primed for a rally on short covering alone. The percentage of stocks trading below their 200-day moving average had reached 20.4%, its lowest level since mid-2012.

With the temporary calm in global markets investors were obviously seeing a good point to cover shorts or invest in stocks at knocked down valuations, particularly in high growth potential stocks. Better valuations in high growth stocks saw the healthcare sector lead the index, gaining 6.3%.

 

Hong Kong

The H-share market and the Hang Seng Index (HSI) have similarly seen strong gains. Trading on the HSI was dominated by more energy-sector related buy out announcements as Li Ka-Shing’s Cheung Kong Infrastructure Holdings offered to buy out sister company Power Assets Holdings. Both stocks rallied more than 7% on the announcement.

But it was the H-share market that attracted the most interest, as it rose for the first time in 17 sessions. Similar to the Nikkei, the market almost could not have looked more oversold at the moment. The percentage of companies trading below their 200-day moving average in the past few weeks reached 0.2%! Its lowest level since 2009. The index was clearly primed for a short covering rally, especially as it was one of the best places to short Chinese companies listed on the Mainland.

 

Australia

The ASX has responded well to improved global sentiment rising 3.4%. But the real standout has been the banks, which have risen 3.4%. All of the Big Four banks have seen their stock price drop by 10% or more since August. This saw their price-to-earnings ratio drop below their long term averages. Despite concerns over refinancing needs and new capital requirements, the compelling yield available in banking stocks clearly has meant that investors are happy with the current pricing. Standing buy orders on the Big Four banks seem to be sitting around the level where they bottomed in late-August. Any return to these levels will clearly re-entice buying of the stocks.

Yesterday Woodside (WPL) offered an all-share buyout for Oil Search (OSH) at a 13% premium to its Monday closing price. This deal is unlikely to be successful at this price, but has opened the door for Woodside to increase its offer or for other entrants to make an offer. Any successful offer for Oil Search likely would need to value it at $9.00-10.00 a share, or a 30-50% premium from its Monday closing price, which is where its share price was trading in mid-2014.

It is interesting to look at where the stocks are trading today in the wake of this announcement. OSH has largely been trading around the offer price level, clearly indicating some uncertainty over the likelihood of the deal going through. WPL’s share price has gained 1.4%, similarly indicating that investors don’t believe the deal will go through.

There is clearly growing M&A sentiment in the energy and related sectors at the moment as we enter the lower end of the commodities cycle. It may still be a bit early to fully kick off, but quality targets are likely to be the ones most attractive to early movers. Oil Search clearly falls into this category, with its stake in the low cost and high growth potential PNG LNG Project.

If you look at some recent deals in the energy sector, you would expect any successful offer for Oil Search to be significantly higher. Shell’s buyout for BG Group earlier in the year was at a 50% premium to its share price. Overnight, Canada’s Emera offered to buy Teco Energy for a 48% premium to its share price, seeing the stock rally 25%.

A range of other entrants could be enticed to bid for Oil Search. The most obvious would be ExxonMobil who is its partner in the PNG LNG Project. Total, who operates the Papuan LNG project, could also potentially be enticed. Not to mention any other foreign oil companies, or energy-focussed private equity companies who could also be interested.

Oil Search has traditionally been a very highly priced company with its long term average P/E at 44.6, and P/B at 2.8. Even with the recent rally in the stock, its P/E is at 19.4 and P/B at 1.7, which clearly makes it a compelling target.

Oil Search does look like one of the most likely buyout targets in the energy sector on the ASX and, if any deal is to go through, its stock does seem likely to rise further.

Comments

  1. On Friday Richard Branson will pitch his One Web global satellite venture to the Coalition Govt as an alternative to the “incredibly expensive” NBN for bringing internet connectivity to remote parts of Australia. “Australia has embarked on trying to connect everybody in Australia.
    That is not realistic. It is incredibly expensive for Australia to reach the last 20 per cent of people. OneWeb can give people wi-fi internet access for a fraction of the price than the government can OneWeb, is planning 800 satellites to provide internet connectivity to people in Africa and remote regions of the world.
    Virgin Group has telecommunications interests through the Optus-owned Virgin Mobile brand.
    The group would also consider bringing its new Virgin Sport business to Australia.

    • That is not realistic. It is incredibly expensive for Australia to reach the last 20 per cent of people.

      Something like 90% of the population lives in an urban centre, so that seems a rather questionable statement.

      Satellite’s latency makes it unsuitable for many tasks.

    • Bertrand Russell

      More drivel WW.

      Seriously – please leave the internet stuff alone – you are so out of your depth – quite literally no idea.

      As pointed out – 90% of Australias population lives in urban areas – so your stats are wrong to start off with. Secondly China has just delivered 1TB over 1000km of a SINGLE STRAND of FIBRE – so, basically – there ends your entire argument.

      Now – talk to me about the single most important aspect of broad band – upload – how do you intend for Australians to upload to these Satellites at GIGABYTE speeds ?

      Any suggestions ?

      Because without it your points are entirely useless.

      Perhaps the farmers could write their messages on hay bales and throw them at the satellites with USB-keys stuffed with data ?

      No suggestions ?

      Thought not.

      • He’s at a loss when it comes to AGW too, but it does not stop him from calling me out all the time. 🙄 Willy wanker is the right term.

    • Branson’s business empire is owned by a complicated series of offshore trusts and companies, yeah that’s kinda how we got in this mess in the first place WW.

  2. Just to keep you all up to speed with my duties in the service of science.
    I would like to advise all I am presenting a truth formula as my achievement for the next Nobel Prize in the area of “Uncovering the Truth”.
    You all are aware of formulas such as Einstein’s Relativity Equations and the apple falling on Newtons head lead to this equation : F=G x (m1xm2)/r2

    My equation is simple and will be well known to MacroBusiness readers of late:
    BR = BS. WW

    • Bertrand Russell

      Coming from someone who advocates wireless as an alternative to FIBRE – lmfao.

      20,000 different plane parts 3D printed – while additive metal processing now approved will replace the rest this year.

      Was that BULLSHIT too ?

      BMW to phase out all petrol for electric within the decade ?

      Seriously champ – when you can refute something with a link we’ll talk. Outside of that suggesting “Virgin” delivers Australians future communication needs in one-way broadcast system is just super awesome.

  3. The Ducks are lining up, Billabong could be next!
    STRUGGLING surfwear brand Quiksilver has finally gone under, filing for bankruptcy in the US and handing over control to a private equity firm.
    The iconic firm, founded in Australia in 1969 by Alan Green and John Law in Torquay, has struggled with its loss-making US surfwear business.
    It will hand over to Oaktree Capital Management, which is also a major investor in rival — and also struggling — surfwear group Billabong.
    Quiksilver’s Australian operations, still believed to be profitable, will not be affected. Wiley to the rescue??

    • They have turned a once really good product company, to a bllsht $80 tshirt shop. No wonder people have deserted them jn droves

    • They will be at a $1 pretty soon imo. I own a bit from a while back, and took notice again when Baker Steel started buying it. Looked terminal for a good second there. I’m still not at my average price but close. EVN is another to keep an eye on. Buying it anytime it dips below $1 has been my strategy.

      • Indeed JC, I was panicking when it showed up -70% return on my portfolio, but am kicking myself now for not backing the truck up below 10c. Thanks for the tip, I’ll check that one out

  4. Josh MoorreesMEMBER

    and just like clockwork the national team afternoon ramp begins. But no interventions here.

    When will the proletariat learn that prices are only allowed to go up!

      • Josh MoorreesMEMBER

        Yep I can see this doing a few rounds of the world before something interrupts it. Feeding off itself each time because you know the US went up so that’s a good reason for AUS to go up which is a good reason for EU to go up which is as good as any for the US to rise. Of course the joker in the deck is china as just about all markets are 100% correlated at the moment and lead by the national team. If other countries had some decency they would be helping them out with their manipulation bills since they are getting so much benefit form them atm.

      • Josh MoorreesMEMBER

        could be they are changing tactics away from the massive gains to ‘just’ 2-3% a day. It seems to be getting easier for them now liquidity has completely dried up in the futures market (as in non existent) and they own 10% of the market with a good portion not allowed to sell on top of that. If they keep it up they’ll end up renationalising the whole bourse.

    • As made explicit by the article those are only the losses on the assets whose ownership is tracked by the FIRB.
      Just imagine how big the losses could be if there was a non-trivial amount of Chinese owned Australian assets that the FIRB didn’t know about (or otherwise didn’t get around to tracking).

    • Last release at perth store there where people who flew in from singapore to queue up. Not one. Several.
      The plan was get the new phone and fly home that night.

    • Interesting reading…

      Three investors who lent the group $1,600,000 between them lining up for 15,000,000 shares in compensation with the existing management maintaining their 28,900,000 shares.

      At the listing price of 20c those things are worth a total $8.8m – for a company that currently has equity of $2.65m.

      Oh, and the top three want another $250,000 each per annum to run the thing.

      How exciting!

      • truthisfashionable

        Thanks for checking the numbers, they sound pretty consistent with most IPO’s lately. I.e. do what Lignje suggests

        Atleast they produce something though 😛

  5. truthisfashionable

    Noticed this:
    http://www.news.com.au/finance/real-estate/name-and-shame-site-reveals-australias-dodgiest-rentals/story-fndbatbk-1227517592318
    in here: http://forums.whirlpool.net.au/forum-replies.cfm?t=2448189

    Dontrentme.com – A site where tenants can identify poor rental properties. Seeing rental agents have their beloved and dirty TICA database, about time something developed for tenants. The mould house in the article sounds like what one of my collegues went through, arriving home after 4 weeks in the UK to find the house infested wasn’t good to come home to.

    • A new survey from McCrindle Research has found that Sydneysiders are a pretty pessimistic bunch.”

      cos we’ve all seen it go to shit over the last ten years, literally everything has gotten worse including the chinese tier driving standards, i’d love to get out of here

  6. Damn SLR
    Damn FWD

    I was hoping that WOW may hit my $24 buy order as it went ex-div, but didn’t. I am still hopeful that WOW may revisit 24 for the first time since 2011 before Santa comes to town.

  7. Just saw the Abbott make his long lost appearance on the ABC. What a hoot!
    Struck me that the Abbott could well be a Cyborg Beta-version pushed through a worm hole from an advanced parallel universe ( just for fun).
    I can’t see any other logical explanation as to why this being has become the most influential power in our nation.
    Worth a watch online.
    In the age of super- automation, he may be best optimised as attack/ defense Minister drone.

  8. re:…”…explanation as to why this being has become the most influential power in our nation…..” ??
    Nope! Nope! Nope!

    re:…”Worth a watch online…..”
    Not before eating thanks.