Monthly Archives: September 2018

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ASX slides on bank sell-off

The Australian sharemarket reversed early gains to close slightly lower on Tuesday, dragged lower by the banks and the miners.
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The benchmark S&P/ASX200 initially traded marginally higher following encouraging leads from Wall Street before closing down 0.2 per cent to 5760.2, while the broader All Ordinaries index finished the day down 0.2 per cent to 5802.8.

Despite a generally upbeat night for commodities markets, resource stocks for the most part didn’t hold on to Monday’s gains. BHP was off 1.2 per cent, Rio Tinto fell 0.7 per cent, while Fortescue Metals closed down 2.1 per cent after CEO Nev Power warned a Chinese iron ore glut could mean the price would fall further. The ASX200 materials index as a whole was 0.5 per cent lower.

Gold stocks were the exception, with Newcrest Mining closing up 0.5 per cent, Northern Star Resources adding 3.9 per cent and Evolution Mining up 5.1 per cent.

“The situation in Manchester is supporting gold prices at the moment, which is hitting a significant technical level here. Most Australian gold stocks are responding to that,” said James McGlew, executive director of corporate stock-broking at Argonaut, referring to an attack at a concert in the British city. The spot price of gold added 0.1 per cent to $US1,262.12.

The impacts of S&P’s credit downgrade of small banks on Monday appeared to still be working its way through the market, with Bendigo Bank extending Monday’s losses to shed a further 1.6 per cent and Bank of Queensland losing 2.5 per cent.

But the big banks gave up ground too, with Commonwealth Bank down 0.4 per cent, Westpac falling 1.0 per cent, NAB down 0.8 per cent and ANZ losing 0.3 per cent. In the financial sector, non-bank stocks – such as Magellan Financial, up 1.5 per cent, and MacMillan Shakespeare, which rose 1.2 per cent – were well supported, noted Gary Huxtable, client adviser at Atlantic Pacific Securities.

As heavyweights in the resource and financial sector retreated, investors turned to bond proxies.

“We’re also witnessing a continuation of the rotation into high-yielding infrastructure stocks,” Mr Huxtable added. Sydney Airport rose 0.6 per cent, Transurban added 0.5 per cent and Crown Resorts finished up 1.4 per cent.

The ASX200’s biggest loser was Brickworks, down 3.6 per cent. The company is currently in the middle of court hearings regarding a law suit about its cross shareholding with Washington H. Soul Pattinson.

Outside the ASX200, Surfstitch shares continued Monday’s dramatic fall, losing another 9.3 per cent after law firm Quin Emanuel’s Damian Scattini announced plans to launch a $100 million class action in the Supreme Court of Queensland.

Stock watch: Mirvac Group

Mirvac shares fell 1.8 per cent to $2.25 after Citi analysts led by David Lloyd downgraded the real estate group to a ‘sell’, with a 12-month price target of $2.11. Citi based the downgrade on risks to residential property volume sales (due to extended settlement times, tightening lending conditions and slowing presales activity), unfavourable market sentiments towards planned master communities and the fact that Mirvac’s price was already pricing in strong office conditions. Citi’s call is a non-consensus one – of the 13 analysts who cover the stock according to Bloomberg, 10 still have it as a ‘buy’, with a consensus 12-month price target of $2.38. A May 17 note from Morgan Stanley’s John Lee was bullish on Mirvac due to its high office exposure. Market movers

Concert attack

Pound sterling slipped and the yen rose after UK police said they were treating a blast that resulted in at least 22 deaths at a concert in Manchester as possible terrorism. AMP Capital’s Shane Oliver said while the attack was unhelpful for market confidence, the long-term the financial impact would likely be muted. “Financial markets may see a minor short-term negative impact but the experience since early last decade has highlighted that terrorist attacks on targets like buildings and sports venues don’t really have much economic impact.”

Iron stockpiles

The record heap of iron ore on China’s doorstep has only grown, with the increase in holdings this year eclipsing the build-up seen over all of 2016 as mills produced unprecedented amounts of steel. Stockpiles at ports rose 1.3 per cent to 136 million tonnes, expanding for a fourth week. In the first few months of 2017, they rose 22.05 million tonnes, surpassing the 20.85 million added last year. Iron ore has stabilised in the $US60s in recent weeks after sinking in March and April on concern rising global production will top demand.

Asia-Pacific markets

The MSCI Asia Pacific Index had risen 1 per cent as the Australian market closed – adding to gains of 35.8 per cent this year. Tencent Holdings, China’s largest internet company, extended gains for the fifth day to trade at a record, lifting Hong Kong’s Hang Seng Index to its highest since July 2015. Taiwan’s Taiex Index touched its highest closing level in 17 years as Hon Hai Precision Industry Co. and AU Optronics Corp. led gains among electronics companies.

Bond bulls

After staking their biggest bet ever against the $US14 trillion Treasuries market at the start of 2017, hedge funds and other large speculators have had a rapid change of heart on bonds. Net-long positions in 10-year Treasury futures are at the highest level since December 2007, reaching 240,010 contracts as of May 16, US Commodity Futures Trading Commission data released Friday showed. To Wall Street strategists, the reversal signals a lasting shift toward bonds becoming back in favour. Benchmark 10-year yields tumbled last week, turning into a haven from drama around Donald Trump’s presidency.

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Credit rating cut incredibly perplexing: BoQ’s Jon Sutton

Standard and Poor s building in New York, in this August 2, 2011 file photo. The United States lost its top-notch AAA credit rating from Standard & Poor s on August 5, in an unprecedented reversal of fortune for the world s largest economy. Picture taken August 2, 2011. REUTERS/Brendan McDermid/Files UNITED STATES – Tags POLITICS BUSINESS GM1E7860Q2401 United States 25069733Regional banks have vented over a cut in their credit ratings that will push up wholesale funding costs for smaller banks and therefore make it harder to compete with their larger rivals.
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After Standard & Poor’s on Monday lowered the credit ratings of 23 institutions but excluded the big four banks, Bank of Queensland and Bendigo and Adelaide Bank expressed frustration and pushed for changes to level the playing field in domestic banking.

Analysts, meanwhile, said any gains smaller banks might have received from the federal government’s bank tax could be wiped out by the credit rating downgrade, which is tipped to eat into smaller banks’ profits.

Bank of Queensland chief executive Jon Sutton said S&P’s decision to lower the bank’s rating from A- to BBB+ while leaving the big four banks’ ratings unchanged was “incredibly perplexing”.

S&P said its main reason for cutting the regional banks’ ratings was the risk of a “sharp correction” in house prices after a sharp run-up led by Sydney and Melbourne. It excluded the big four because it assumes they would be bailed out by the government in a financial crisis.

“When you think about the big four banks, they have very large exposures to those markets of Sydney and Melbourne, and they were not affected by S&P’s downgrade,” Mr Sutton told BusinessDay.

“We don’t have high-concentration risk in Sydney or Melbourne. That’s why I find it incredibly perplexing what S&P has done and their arguments for it.”

In the medium term the bank is likely to pay 5 to 10 basis points more for wholesale debt as a result of the rating cut. But he said it was too simplistic to say this would remove the competitive gain from the bank tax, which only the larger banks will pay.

Bendigo chief executive Mike Hirst noted that S&P’s explanation for the downgrade included the sentence: “we consider that the four major Australian banks materially drive the system-wide risks in Australia given the collective dominance of these banks.”

Mr Hirst said: “They’re driving it, they hold 80 per cent of that risk, yet they were the only ones that didn’t get downgraded. This is the frustration of the uneven playing field.”

In response, smaller banks expect regulators will soon tweak capital rules that allow Commonwealth Bank, National Australia Bank, ANZ, Westpac and Macquarie to hold less capital for every dollar lent.

The Australian Prudential Regulation Authority will publish a paper on capital requirements in the coming months, and Mr Sutton said it was likely to deal with “risk weights” – models that allow the major banks to hold less capital against mortgages.

“There’s been a lot of philosophical debate about what ‘unquestionably strong’ means. I would not be surprised if there are changes in risk weights for mortgages and different classes of mortgages in that discussion paper,” he said.

Shares in regional lenders were hardest hit by a dip in bank stocks on Tuesday, with BoQ falling 2.5 per cent to $11.37 as Bendigo shares lost 1.6 per cent to $11.64.

Deutsche Bank analyst Andrew Triggs estimated the cut would lower Bank of Queensland’s profits 2.4 per cent, and Bendigo’s profits would be 1.5 per cent lower than previously estimated.

Principal at credit market consultancy ADCM Services, Philip Bayley, estimated the S&P ratings cut would raise the smaller banks’ cost of issuing new three-year debt by 8 basis points. That compares with the bank levy increase of 6 basis points

“It’s going to be significant for the regional banks. They are all facing cost increases, all things being equal,” Mr Bayley said.

S&P on Monday played down the importance of individual banks’ exposures to Sydney and Melbourne. It said a sharp fall in house prices in the country’s two biggest cities would hit the broader national economy through weaker employment, economic growth, consumer sentiment and falling house prices elsewhere.

“If a sharp fall in house prices in Melbourne or Sydney were to occur, we believe that most financial institutions in Australia would be adversely affected even when they do not have significant direct exposure to these properties,” S&P said.

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Townhouses likely for road research land

Chinese property developers have snapped up a large infill suburban site in Melbourne’s outer east that was previously used for road safety research.
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The Australian Road Research Board is expected to receive a hefty boost to its coffers after selling the 25,830-square-metre site to Hong Se International.

It is understood the large property at 500 Burwood Road in Vermont South fetched more than $25 million.

CBRE agent Julian White, who negotiated the deal with colleagues Mark Wizel, Nathan Mufale and Chao Zhang, refused to confirm the details.

The ARRB, a research body established in 1960 and owned by state road authorities, has landholdings in every major capital city. The ARRB will move to new digs closer to the city.

Former Liberal politician and newly appointed ARRB chief executive Michael Caltabiano said “It was clear to see we were sitting on a piece of land that had more value to potential developers than it did our organisation.”

The land was sold without a planning permit but has heritage protection orders on its 1970s-era office buildings. There are 13 buildings on site.

The site, about 20 kilometres from the CBD, abuts an aged care facility and is across the road from the Vermont South Shopping Centre. It is a five-minute drive from the EastLink tollroad.

Mr White said Hong Se International beat 12 other groups bidding for the land, which is in the heart of the eastern suburbs.

“It’s a really strong transaction. Townhouses, anything medium-density is hot right now. Banks are happier to finance the townhouse market because it can be more easily staged,” Mr White said.

The deal is the latest in a string of land sales in the eastern suburbs. A former gym on a 1.7-hectare site in Wheelers Hill, on the corner of Ferntree Gully and Jells roads, sold to a Chinese developer for more than $20 million recently.

CBRE agent Mark Wizel said it was the tenth development site deal in six weeks, totalling $110 million in sales.

“Strong competition between aggressive local and offshore buyers is driving demand,” Mr Wizel said.

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No swansong for chief postie at Senate estimates hearing

Ahmed Fahour outgoing MD and CEO of Australia Post and Chairman John Stanhope appeared before Senate estimates at Parliament House in Canberra on Monday 27 February 2017. Photo: Andrew Meares Our chief postie, Ahmed Fahour, will be a no-show at Wednesday afternoon’s Senate estimates committee hearing – which is a pity considering the ratings generated by his previous appearance.
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But is he sending a signal as to who he wants to succeed him in July by appointing Australia Post’s chief customer officer, Christine Corbett, to face the political bear pit in his place?

Apparently not, Aussie Post says she is a regular at these gigs and therefore the safest pair of hands to defuse any bombs from the committee.

She will be quizzed by the committee just hours after it has grilled Australia Post’s rather incurious shareholder: the Department of Communication and the Arts.

The department’s boss, Mitch Fifield, will front Senate estimates in the morning to explain the lack of attention it has paid to the mahogany row pay packets on offer at the postal service.

Last week the department answered some questions on notice revealing just how incurious it had been about just how much Fahour had been paid.

It was asked if Malcolm Turnbull knew how much Fahour was paid.

The department noted that Fahour’s pay packet was not detailed in the 2015 annual report and said, “The department is not aware that the then-minister had any further information in relation to Mr Fahour’s remuneration beyond what was in the public domain”.

In other words, no.

This happy state of affairs remained until October when a Senate estimates hearing grilled Fahour over his pay packet.

After that October 18 appearance, the department said it “sought information from Australia Post about senior executive remuneration to facilitate responses to the committee’s questions on notice”.

It didn’t get a response. Oh well, never mind.

It remained in blissful ignorance until February 27, when the Senate committee released the information publicly – just ahead of Fahour’s swansong appearance before the committee the following day.

Many corporate boards would kill for a shareholder like this. Primary Greggxit

CBD always wondered how Peter Gregg was going to juggle his legal challenges, and CEO duties at Primary Health Care over the coming months.

Gregg resigned after he was charged with two counts of falsifying records while an executive at Leighton Holdings, but still planned to stay on as the health group’s CEO until his replacement, Malcolm Parmenter, joined in September.

That is no longer the plan.

The company announced on Tuesday that Gregg is stepping down “effective immediately” to be replaced by the group’s chief financial officer, Malcolm Ashcroft, who will fill in as a temporary CEO until September.

Primary Health Care would not say if common sense had prevailed, or if Gregg’s impending legal battle has called him away from office duties.

The good news is we will now get the details of his exit package in the company’s annual report later this year, rather than next year. Lithium high

Lithium explorer Global Geoscience has been on a tear over the past year. The ASX-listed stock has rocketed from less than 1?? to a high of 19?? this week.

So the market could be forgiven for not overreacting to the seismic news of two VIP recruits joining its board on Tuesday.

Alan Davies – the executive that Rio Tinto sacked over a suspicious multimillion-dollar payment, not the British comedian – is one of them.

The significance for Davies is that this is his first public role since being scapegoated by Rio Tinto, which terminated his services – and that of legal counsel, Debra Valentine – based on the initial findings of a company investigation into payments to a consultant who helped Rio access the massive Simandou iron ore deposit in Guinea, West Africa.

Davies has threatened legal action, and got on with his life.

Earlier this year he joined the privately owned African copper explorer, Moxico, as its CEO and also started his own advisory service.

His interest in a lithium and boron explorer like Global Geoscience fits with his role at Rio where he oversaw the miner’s own lithium and borate operations, which means he understands the value of the ASX group’s US assets.

So does his fellow inductee John Hofmeister, the former head of Shell Oil’s US operations. His colourful career post-Shell has included writing a book titled Why We Hate the Oil Companies, it was released just before BP’s Deepwater Horizon catastrophe in the Gulf of Mexico.

Hofmeister’s message from 2011 is not a bash of big oil, but more a lament about the looming energy crisis that he largely attributed to political inaction – a message that would find a welcome home in Australia right now.

He went on to found Citizens for Affordable Energy (US citizens we presume) and obviously likes what he sees in new technologies such as lithium batteries – and a company like Global Geoscience that plans to extract the raw material in Nevada.

Global Geoscience boss Bernard Rowe told CBD that neither director was gifted shares in the company as an enticement. They will have to count on the stock’s continued upward trajectory to get their options in the money.

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Australia losing its economic vibrancy, boss of Orica warns

The boss of explosives group Orica has warned Australia risks facing a future that will look increasingly like “France and not Singapore” as the country loses its economic vibrancy and as China’s economy changes gear.
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“The dynamic, vibrant economy that I saw when I first came [to Australia] is not present any longer,” Alberto Calderon warned in an address to a Latin American business group late on Tuesday. “Our economy will look more and more like France, not like Singapore. But this is not inevitable; this can be changed.”

The warning came as the easy gains to Australia’s exports from the surge in China’s standard of living, which had lifted demand for Australia’s exports of iron ore and coal, for example, is now maturing. Its rising standard of living and expanding middle class will lift demand for copper, instead, he said.

“This optimism for the long-term copper outlook sits on the back of China’s economic progress and the increasing movement of its populace into the middle class,” Mr Calderon, a former senior executive with BHP, said in his address. “You can reliably track the demand from steel-making commodities such as iron ore and coking coal, to more consumer product inputs such as copper and aluminium, by looking at GDP per capital. Demand for copper plateaus much later in the industrialisation cycle, compared with the bulk commodities.

“Steel intensity tapers off when GDP per capita reaches around the $US15,000 level (on a purchasing power parity basis), while copper demand keeps growing until GDP per capita hits between $US30,000 and $US40,000. China accounts for around 45 per cent of global refined copper demand, and by the end of 2015, its GDP per capita was around $US14,450. Gold has similar market dynamics to copper.”

Like Latin America, the challenges facing Australia such as the impact of falling commodity prices on royalties and national income, declining ore grades, labour productivity and industrial relations, need to be tackled by making the country as competitive as it can be to attract business investment, to innovate and grow. This also means tackling the high rate of corporate taxation, he said.

“Corporate taxes are the highest in the OECD, consumption taxes the lowest,” he argued. “Make this boundless country as competitive as possible, and incentivise productivity to unleash its undoubted potential. Unfortunately we seem to be following the path of France and other developed low-growth countries.”

Higher taxes on investment along with higher government spending work to crowd out the private sector, he warned.

“The easy charm of Melbourne and Australia has bewitched me,” Mr Calderon said, “and, if the government doesn’t keep changing the rules, I plan to apply for permanent residency next year.”

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