Weekly stock market update 13/07/2012

The Aussie sharemarket has continued to seesaw, echoing Wall Street, which saw its earnings season kick off with mixed results and debate over Federal Reserve action.
Image: Stanley Hong

The Australian sharemarket has continued to seesaw, with the previous week’s four-day winning streak followed by a six-day losing run the next. The downward slide echoed that on Wall Street, which saw its earnings season kick off with mixed results and debate over further action from the Federal Reserve.

Global economic worries have proved testing for investors, although China’s 7.6 per cent expansion in second quarter gross domestic product met expectations despite being the slowest rise in three years.

In Australia, positive consumer confidence data improved sentiment, although it was dimmed by weaker j obs figures and the demise of retailer Darrell Lea.

Nevertheless, fund managers have indicated a recovery is in sight, with a HSBC survey showing the majority intend to buy more shares than bonds in the third quarter of 2012.

In company news, more than $1 billion was wiped off the market value of Iluka Resources (click links for news and market data) after it warned that demand for titanium minerals had “hit a brick wall”. The mineral sands producer cut its 2012 sales guidance for the third time due to its pessimistic view on the major global economies, although it also reported a 16 per cent rise in first half 2012 sales revenue due to higher prices.

CSR chairman Jeremy Sutcliffe has blamed low aluminium prices and weak property markets for the company’s low share price. However, the chairman told shareholders at the company’s annual general meeting that signs of improvement were evident in the housing market, boosting its strategy of expanding its building products business.

Broker comment

“Trading volumes have been exceptionally low, partly due to seasonal factors such as school holidays and being between reporting seasons, but there’s generally been a lack of confidence to invest,” said Simon Condon, Senior Client Adviser at Bell Potter.

“Yet while it’s understandable that many investors are sitting on their hands right now, the savvy ones are using this period to accumulate shares and take advantage of the strong yields on offer compared to cash rates.”

Ins and outs

Rio Tinto veteran, chief financial officer Guy Elliott has announced his decision to retire at the end of next year. He will remain in his role at the major resources company until a successor is appointed.

Meanwhile, ANZ chief executive Mike Smith has been named as a potential candidate to replace former Barclays boss Bob Diamond. The British bank is reportedly focusing on external candidates following the Libor scandal which cost Diamond his job.

Takeover plays

Santos is seen as a potential takeover target in the energy sector, with the fall in its share price to near-GFC lows boosting its attractiveness to a predator.

According to Bell Potter, international oil majors including ConocoPhillips, Shell and Total are seeking to grow their presence in Australian unconventional gas and the current market weakness makes Santos an ideal opportunity.

Stocks to watch

UGL and AMP are two of our favoured yield stocks right now, with both companies offering attractive yields above 7 per cent to investors,” Bell Potter’s Condon said.

A diversified services group, UGL has outperformed rival contractors Downer EDI and Transfield Services in its share price performance this year, having a global facilities management business as well as resources industry exposure.

Diversified wealth manager AMP is also seen benefitting from the growth of compulsory superannuation in Australia, and is supported by its strong balance sheet and excess of capital above the minimum regulatory requirements.

The week ahead

Production reports from miners BHP Billiton and Rio Tinto will be closely watched following recent broker downgrades, while Fortescue Metals, PanAust and Woodside Petroleum are also due to reveal quarterly figures.

In domestic economic news, the Reserve Bank of Australia will release the minutes of its latest monetary policy meeting, with other data due including building activity, lending finance and business confidence figures.

Overseas, the Federal Reserve’s Beige Book will review the U.S. economy’s performance, with housing starts data also due. US earnings season continues with results due from Bank of America and Citigroup.

This week's tip

“It’s important to take a long-term perspective as it’s difficult to achieve success in the sharemarket by trading short term. Given the dividends on offer and the prospects for equity returns, investors with longer horizons should be looking at shares and not be scared into cash, annuities or bonds,” Condon said.

“For new investors, Howard Marks’ ‘The Most Important Thing’ is worth reading as it has some good ideas on investment philosophy and behaviour.”

Previous market update: 06/07/2012 

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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.