The Sydney Chart Seminar
Comment of the Day

May 12 2011

Commentary by Eoin Treacy

The Sydney Chart Seminar

Eoin Treacy's view There seems to be a perception among some Australian investors that their domestic market is underperforming Wall Street. It is easy to reach such a conclusion when comparing nominal performance because the ASX200 has been ranging between 4400 and 5000 for 18 months, but it would be incorrect. Compare the S&P denominated in Australian Dollars and the ASX in US Dollars and one gets a much better idea of how much the Australian Dollar's ascent against the US Dollar has affected returns. This also helps to explain the preference of Australian investors for domestic assets. Unsurprisingly, delegates at the Sydney seminar were primarily interested in the resources sector.

The Australian Trade Weighted Index has advanced by more than 50% since late 2008 and surmounted the pre-crisis peak late last year. It is currently overbought in the short term and posted a downside key reversal yesterday suggesting potential for some additional consolidation of recent powerful gains. Against the US Dollar, the Australian Dollar posted a large outside week last week and has followed through this week. At least a partial reversion towards the mean, currently near $1, appears to be underway.

The price of fruit and vegetables has risen in the aftermath of the floods which has been among a number of factors contributing to somewhat higher than expected CPI figures for the first quarter. Interest rate differentials remain in favour of the Australian Dollar and while there is short-term scope for a reversion towards the mean the long-term outlook for the currency remains bullish.

Gold in Australian Dollars was a major topic of conversation at the Sydney seminar. The yellow metal is increasingly being remonetised in the eyes of investors. Therefore it has performed less well when compared to the Australian Dollar of late than it has against weaker currencies. However, while gold has lost some upward momentum against the Australian Dollar over the last year, its 6-year progression of higher major reaction lows remains intact and a sustained move below A$1250 would be required to begin to question uptrend consistency.

The divergence between the performance of the ASX200 Finance Index and the ASX300 Resources Index exemplifies the dichotomy between the health of the resource-led export sector and the obstacle to growth posed by the strength of the currency for the domestic economy.

The Australian franking system of dividend payments means domestic investors avail of a significantly higher payout than foreign investors. National Australia Bank (8.06%), Westpac (8.41%), ANZ (8.81%) and Commonwealth Bank of Australia (8.34%) all offer attractive yields but have underperformed over the last year as they reinvented themselves as domestic lenders. Both National Australia Bank and Westpac have shown a rounding characteristic over the last few months consistent with a gradual return to demand dominance but will need to hold their progressions of rising lows on the current pullback to sustain this outlook. ANZ has pulled back sharply over the last two weeks and is now testing the lower side of the 8-month range near A$22. An upward dynamic from the current region is now required to check scope for an additional test of underlying trading. Commonwealth Bank of Australia is also pulling back from the upper side of the yearlong range.

BHP Billiton retested its 2008 peak near A$50 in April and has since pulled back to test the 200-day MA near A$44. If the medium-term uptrend is to remain reasonably consistent it will need to find support above the A$40 area. Rio Tinto has experienced a loss of momentum and is now also testing the 200-day MA. A clear upward dynamic is required to indicate demand is returning to dominance.

Telstra has been a bitter disappointment for many investors; to the point that some express antipathy towards the share. In common with telecoms companies globally, Telstra pays out an attractive dividend which is currently 13.5% with franking. According to delegates, the company had to borrow to pay the last dividend but has guaranteed the payout for the next 18 months. In addition, the previous largest holder, the Future Fund, has disposed of its position. In terms of price action the share has lost downward momentum, found support above A$2.50 and is currently testing the upper side of the six-month range near A$3. Base formation development appears to be underway.

Delegates also expressed an interest in uranium, not least because of the effect the Japanese nuclear accidents have had on sentiment. The general opinion was that nuclear reactor construction in Asia would continue and that the sector was probably a medium-term recovery candidate. Paladin Energy has pulled back sharply over the last few months and is currently testing the mid March nadir above A$3. A clear upward dynamic will be required to confirm support in this area. Energy Resources of Australia has suffered both from the Australian floods and the Japanese nuclear crisis. It continues to accelerate lower and is currently in the region of the psychological A$5. However a clear upward dynamic, sustained for more than a day or two, would be required to confirm support in this area. Extract Resources continues to hold above A$6 despite recent statements from the Namibian government concerning nationalisation of uranium mines. This article from Mineweb may be of interest.

Delegates were also interested in rare earth resources. (Also see David's section yesterday on this subject). I got chatting to an opal miner in Melbourne who was also a font of knowledge on small cap miners. He opined that Australian listed Greenland Minerals & Energy had overcome concerns about ownership of its leases. This article by Marianne Stigset for Bloomberg does not mention rare earth metals but does suggest that Greenland is free to allocate mining licenses at its discretion. The share price has a similar pattern with others in the sector.

Australian natural gas export capacity is being rapidly expanded. Subscribers will be familiar with our belief that unconventional gas and more recently unconventional oil exploitation is a game changer for the energy sector. LNG is likely to make gas an internationally traded commodity. UK listed BG Group has significant Australian natural gas interests. The share pulled back sharply over that last two weeks, probably in sympathy with oil and is now testing the 200-day MA and the 2008 peak near 1400p. An upward dynamic is required to confirm support in this area.

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