Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
The RBA appears set to lower the official cash rate for the first time since August 2016 after the Q119 data showed it was moving away from the bottom of its 2% to 3% target band. The Bank will also need to lower its inflation and growth forecasts in its May Statement on Monetary Policy, which is released on Friday inflation.  The policy move is not yet fully priced by financial markets and we expect interest rate sensitive sectors and stocks to rally if we are proven correct</li>
<li>
Australia (2.4%) underperformed many global peers during April, but outperformed Argentina (-11.6%), China B Shares (-2.4%), China A Shares (-0.4%), India (0%), Brazil (1.0%) and the UK (2.3%). Germany (7.1%), Singapore (6.1%) and Europe (5.5%) were the best-performing markets followed by Japan (5.0%) and France (4.9%).</li>
<li>
In Australia, Financials gained 4.4% in the month propelling the ASX 200 2.4% higher. Consumer Staples (7.3%) and IT (7.3%) rallied strongly, while Materials (-52.0%), Property (-1.9%), Utilities (-0.5%) and Consumer Discretionary (1.3%) were the laggards.</li>
<li>
Net downgrades eased in March and have now become net upgrades led by Utilities, Consumer Discretionary, Property, Industrials and Healthcare. However, this has been mainly due to a large decline in downgrades rather than a large increase in upgrades.</li>
<li>
The main exception was Resources where there were more upgrades relative to the long-run average. There was also a large decline in the number of downgrades and this helped bolster the result, despite the weak share price performance of the sector during the month.</li>
<li>
The labour force data remains solid and one argument why the RBA may not lower the cash rate tomorrow. The economy created 25.7k jobs in April, although rising participation meant the unemployment rate nudged up by 0.15pt to 5.0%.  Better global data is also another reason why the RBA may hold fire, with PMI data in China and the US showing the global growth slowdown may have run its course for now.  The Australian bond market rallied strongly last month, and real 10-year yields are close to their lowest level since the mid-1970s.  Indeed, the bond market expects inflation to remain stable and stubbornly low over the longer-term.  The Australian dollar rallied against the NZ dollar but weakened vs the US dollar on the back of broad US dollar strength.</li>
<li>
VEA, BOQ and BKL lowered guidance, while RIO guided the market to lower production in the Pilbara from that announced to the market last month. Disruptions from Cyclone Veronica to RIO's iron ore production in the region were larger than expected.  BOQ is seeing rising costs due to remediation costs from the Banking Royal Commission, but net interest margins and impairment charges seem well contained.  VEA is seeing margin pressure due to rising global oil prices.</li>
</ul>



The RBA appears set to lower the official cash rate for the first time since August 2016 after the Q119 data showed it was moving away from the bottom of its 2% to 3% target band. The Bank will also need to lower its inflation and growth forecasts in its May Statement on Monetary Policy, which is released on Friday inflation.  The policy move is not yet fully priced by financial markets and we expect interest rate sensitive sectors and stocks to rally if we are proven correct

Australia (2.4%) underperformed many global peers during April, but outperformed Argentina (-11.6%), China B Shares (-2.4%), China A Shares (-0.4%), India (0%), Brazil (1.0%) and the UK (2.3%). Germany (7.1%), Singapore (6.1%) and Europe (5.5%) were the best-performing markets followed by Japan (5.0%) and France (4.9%).

In Australia, Financials gained 4.4% in the month propelling the ASX 200 2.4% higher. Consumer Staples (7.3%) and IT (7.3%) rallied strongly, while Materials (-52.0%), Property (-1.9%), Utilities (-0.5%) and Consumer Discretionary (1.3%) were the laggards.

Net downgrades eased in March and have now become net upgrades led by Utilities, Consumer Discretionary, Property, Industrials and Healthcare. However, this has been mainly due to a large decline in downgrades rather than a large increase in upgrades.

The main exception was Resources where there were more upgrades relative to the long-run average. There was also a large decline in the number of downgrades and this helped bolster the result, despite the weak share price performance of the sector during the month.

The labour force data remains solid and one argument why the RBA may not lower the cash rate tomorrow. The economy created 25.7k jobs in April, although rising participation meant the unemployment rate nudged up by 0.15pt to 5.0%.  Better global data is also another reason why the RBA may hold fire, with PMI data in China and the US showing the global growth slowdown may have run its course for now.  The Australian bond market rallied strongly last month, and real 10-year yields are close to their lowest level since the mid-1970s.  Indeed, the bond market expects inflation to remain stable and stubbornly low over the longer-term.  The Australian dollar rallied against the NZ dollar but weakened vs the US dollar on the back of broad US dollar strength.

VEA, BOQ and BKL lowered guidance, while RIO guided the market to lower production in the Pilbara from that announced to the market last month. Disruptions from Cyclone Veronica to RIO's iron ore production in the region were larger than expected.  BOQ is seeing rising costs due to remediation costs from the Banking Royal Commission, but net interest margins and impairment charges seem well contained.  VEA is seeing margin pressure due to rising global oil prices.


Aussie Equities Month in Review (April 2019)

Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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Thematic (Sector/Industry)

<ul>
<li>China implements coal import caps specifically targeting Australian producers</li>
<li>Unclear as to how widespread these restrictions will eventually be</li>
<li>Thermal and metallurgical coal exports affected</li>
<li>Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income</li>
<li>Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income</li>
<li>Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP </li>
<li>Actions appear to be a response to blocking Huawei bidding for the 5G network</li>
<li>Recent Chinese cyber-attacks harden Australian Government's resolve</li>
<li>Expect similar Chinese measures (in time) to be applied to other commodities and industries</li>
</ul>


China implements coal import caps specifically targeting Australian producers
Unclear as to how widespread these restrictions will eventually be
Thermal and metallurgical coal exports affected
Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income
Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income
Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP 
Actions appear to be a response to blocking Huawei bidding for the 5G network
Recent Chinese cyber-attacks harden Australian Government's resolve
Expect similar Chinese measures (in time) to be applied to other commodities and industries


Confluence of Politics - China Bans Australian Coal Imports (Flash Note)

Over 25-yrs in Global Materials & Soft Commodities

Charles Spencer

Equity Bottom-Up

Angang Steel Co Ltd (H) / Equity Bottom-Up

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short <a href="https://www.smartkarma.com/entities/203" target="_blank" data-smartkarma-citation="entities:203:1">Angang Steel Co Ltd (H) (347 HK)</a> shares with a PT of HK$5.

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short Angang Steel Co Ltd (H) (347 HK) shares with a PT of HK$5.

<ul>
<li>
<a href="https://www.smartkarma.com/entities/23731" target="_blank" data-smartkarma-citation="entities:23731:1">Vale SA (VALE US)</a> have had two major fatal dam-failures in three years</li>
<li>Possible (probable?) design flaw</li>
<li>Expect all Vale's iron ore operations to be technically audited</li>
<li>Substantial Management &amp; Board changes inevitable</li>
<li>Probability that a portion of Vale's existing operations will fail engineering inspection.</li>
<li>Forecast resultant capacity constraints</li>
<li>
<a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a>,  <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">Bhp Billiton (BHP AU)</a>, <a href="https://www.smartkarma.com/entities/41" target="_blank" data-smartkarma-citation="entities:41:1">Fortescue Metals (FMG AU)</a> to benefit from lost production</li>
</ul>



Vale SA (VALE US) have had two major fatal dam-failures in three years
Possible (probable?) design flaw
Expect all Vale's iron ore operations to be technically audited
Substantial Management &amp; Board changes inevitable
Probability that a portion of Vale's existing operations will fail engineering inspection.
Forecast resultant capacity constraints

Rio Tinto Ltd (RIO AU),  Bhp Billiton (BHP AU), Fortescue Metals (FMG AU) to benefit from lost production


Vale in Trouble - Expect Rio, BHP, FMG to Benefit (Flash Note)

Investment Conclusion: We recommend closing our long-<a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a>/short-<a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">Bhp Billiton (BHP AU)</a> following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: <a href="https://www.smartkarma.com/insights/us-20bn-in-lost-market-cap-looks-hard-to-justify-recommend-long-rio-short-bhp" target="_blank" data-smartkarma-citation="insights:23456">US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP</a>

Investment Conclusion:  We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP

RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP

Australia

Rio Tinto Limited is an international mining company.  The Company has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock, diamonds, talc and zircon. Dually-listed company with RIO LN.

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Rio Tinto Ltd (RIO AU)

Aussie Equities Month in Review (April 2019)

The RBA appears set to lower the official cash rate for the first time since August 2016 after the Q119 data showed it was moving away from the...

Shane Lee

Confluence of Politics - China Bans Australian Coal Imports (Flash Note)

China implements coal import caps specifically targeting Australian producers Unclear as to how widespread these restrictions will eventually...

Boost Research

Angang Steel: Headwinds Intensify

INVESTMENT VIEW: The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe. Chinese steel...

Charles Spencer

Vale in Trouble - Expect Rio, BHP, FMG to Benefit (Flash Note)

Vale SA (VALE US) have had two major fatal dam-failures in three years Possible (probable?) design flaw Expect all Vale's iron ore operations to...

Boost Research

RIO & BHP: Valuation Gap Gone; Closing Long-Rio/Short-BHP

Investment Conclusion: We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both...

Charles Spencer

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