Daily Markets Update – September 3

Market Wrap

  • The Australian market finished the week down 0.8% in the week to Friday based on the S&P/ASX 200 Index.
  • Small companies underperformed larger companies, with the Small Ordinaries Index finishing the period down 3.3%. 
  •  The best performing sector was the Health Care sector, up 3.8%, with best performer being CSL Limited (CSL) up 5.1%.

Strategy and economics 

  • > Equity Strategy – Reporting season update #3–Industrials the stand out…but focus shifting to FY13
    • MRE’s Market FY12 EPSg forecast edged to stand at -3.2% while unsurprisingly the FY13E EPSg forecast was downgraded to stand at +6.9%.
    • Stocks reporting this week +vely surprising include – IAG, ILU, QRN, MND, SUL & SKE while stocks to –vely surprise BSL, FMG, SUN & TRS.
  • Budget Update – How is the surplus forecast faring?
    • With current commodity prices, we estimate that there will be a $10b shortfall in government revenue.
    • Hence, if the Government maintains its commitment to a budget surplus, it may need to tighten fiscal policy by 0.8% of GDP unless prices soon recover.
  • Australian Iron Ore Majors – Pressures rise as prices fall
    • While we expect a recovery in due course, we look at the financial stresses and valuation implications of lower iron ore prices, should they last.
    • We anticipate massive ~50% and ~80% cuts to 2013 earnings for BHP and RIO respectively if iron ore price persist at current sub US$100/t levels.
    • While the market’s funding concerns focus most on FMG, we note that both BHP and RIO would also have to adapt to a new ‘lower for longer’ environment.
  • Australia’s Carbon Tax – Linked to Europe’s Emissions Trading Scheme
    • Australia’s Climate Change Minister, Greg Combet, announced that Australia will scrap its planned floor price for carbon emissions after July 2015.
    • Australian companies will be able to purchase permits from the European Union’s Emissions Trading Scheme.
    • The Australian government said that it won’t alter the household assistance payments and tax cuts that were designed to compensate households