Weekly market update 18/01/2013

Australian shares have hit 20-month highs amid renewed confidence in the global economic outlook, along with the prospect of further interest rate cuts.
Image: Stanly Hong

Australian shares have hit 20-month highs amid renewed confidence in the global economic outlook, along with the prospect of further interest rate cuts. US stocks were trading at levels not seen since 2007 on stronger labour and housing data, while China reported a better than expected 7.9 per cent expansion in fourth-quarter gross domestic product.

In Australia, a rise in the unemployment rate to 5.4 per cent spurred speculation of further interest rate cuts by the Reserve Bank of Australia, with its first monetary policy meeting of 2013 scheduled for February 5.

In company news, Rio Tinto (ASX:RIO) (click links for news and market data) shocked investors with one of the biggest write-downs in Australian corporate history. The mining giant said it was “deeply disappointed” by the US$14 billion in impairment charges on its aluminium and coal businesses.

Rio’s chief executive Tom Albanese resigned by “mutual agreement” and was replaced by former iron ore head Sam Walsh, in a move welcomed by investors and analysts.

Investor sentiment remained positive with market gains increasing confidence, according to Simon Condon, private client advisor at Bell Potter.

“A steadily rising market has flowed through the post-holiday season into a generally upbeat mood, even though plenty of people are still sitting on the sidelines,” he said.

Who’s hot: CPU

Increased merger and acquisition (M&A) activity in 2013 could be positive for investor services provider Computershare (ASX:CPU).

According to analysts Credit Suisse, corporate activity accounted for only 9 per cent of Computershare’s group revenue in fiscal 2012, but an anticipated pick-up would boost earnings.

Shares in Computershare have outperformed the benchmark S&P/ASX200 index since the start of 2013, with analysts expecting stronger market activity to continue.

Who’s not: ILU

Weakening demand for mineral sands has hit Iluka Resources (ASX:ILU), which announced plans to idle its Eneabba plant in Western Australia less than 18 months after reopening it.

The mining firm also announced in its latest production report a 30 per cent fall in production of zircon, rutile and synthetic rutile in 2012 compared to the previous period.

Takeover plays: BBG

The takeover drama at surfwear company Billabong International (ASX:BBG) has continued, with the company announcing on Monday an alternative offer from Altamont Capital Partners and VF Corporation valued at $1.10 per share.

The offer matched the previous bid made by the Sycamore consortium, with investors hoping for a bidding war over the Gold Coast-based company.

Stocks to watch: WHC

“There’s value in the severely sold down coal sector. Recovering PCI and thermal prices together with improved equity market sentiment and Chinese growth have sparked renewed buying in coal stocks, both large and small caps,” Bell Potter’s Condon said.

“Our top coal stock is Whitehaven Coal (ASX:WHC), which has high quality assets and high production growth forecast over the next few years. There’s also market speculation about the fate of Tinkler Group’s stake, and that could spark corporate activity.”

The broker has a 12-month price target for Whitehaven of $4.40 per share.

The week ahead

Australian investors will keep a close eye on Wednesday’s consumer price index data and its implications for interest rates, with analysts forecasting a headline rate of 2.6 per cent.

In local company news, BHP Billiton (ASX:BHP) will release its latest quarterly production report, along with Fortescue Metals Group (ASX:FMG) and PanAust (ASX:PNA).

Overseas, US home sales and manufacturing data will provide clues concerning the recovery of the world’s biggest economy.

US markets are closed on Monday for a public holiday, but later in the week earnings reports from tech giants Apple, Google and Microsoft will attract keen interest.

In Asia, Chinese leading economic index and manufacturing indicators are due, while Japan will report merchandise trade and inflation figures.

Advice for new investors

“If you have a long investment time horizon, the compounding effects of reinvested dividends are incredible. Stick predominantly with high quality equities, which are producing steadily increasing dividends,” Condon said.

Condon suggested investors read Marc Lichtenfeld’s Get Rich with Dividends: A Proven System for Earning Double-Digit Returns.

“If you need to be convinced by the power of dividends and why market declines should not overly stress you, read this book. It’s mainly based on US markets, but is probably even more relevant here.”

Previous market update: 11/01/2013

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Anthony Fensom A former ASX employee, Anthony Fensom has spent nearly 15 years in the financial/media industries of Australia and Asia. Having been through the dot.com boom and bust, the resources boom and the GFC, he is a great believer in patient investing and in understanding market and economic cycles.