Investors distracted by ongoing Greek crisis

It was a mixed day on the stock market, with financial and materials stocks weighing on the local bourse, as investors' attention turned from some solid local earnings to the ongoing problems in Greece.

By InvestSMART · 29 Feb 2012

By InvestSMART ·
29 Feb 2012

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The benchmark S&P/ASX200 shed 4.7 points, to 4262.7, while the All Ordinaries lost 3.3 points, to 4351.2.

CommSec market analyst Steve Daghlian said the local market had little to work with after a weak lead from US markets overnight.

The German parliament overwhelmingly approved a second loan package for Greece, but that was expected, Mr Daghlian said.

Mining and financial stocks, which represent about 60 per cent of the Australian market, were lower, with ANZ the weakest of the big four banks, down 20?, or 0.91 per cent, to $21.88.

NAB lost 20?, to $21.88. Commonwealth Bank lost 29? to $49.15, and Westpac shed 3? to $20.68.

Telstra shares rose 1.24 per cent, or 4?, to $3.27 after the competition watchdog approved plans to split the company in two.

The decision by the Australian Competition and Consumer Commission will allow Telstra to shut down its copper network and shift its 10 million customers, over the next decade, to the Labor government's $36 billion national broadband network.

Richard Morrow, the director of EL&C Baillieu Stockbroking, said the decision was a "huge landmark" that put "a lot of confidence back into the Telstra market". The decision helped lift the telecommunications sector, which rose 0.59 per cent.

Mining giant BHP Billiton was 7? softer at $35.75, while Rio Tinto gained 30? to $67.70.

This reporting season has seen "cyclical" stocks, which rise and fall with economic growth, significantly re-rated to represent the pick-up in domestic economic activity.

As the financial house Goldman Sachs points out, large cap industrials with exposure to domestic conditions are up about 18 per cent since January 1, outperforming defensive stocks by 15 per cent.

That has given some of Australia's retailers cause to cheer, with the industry enjoying a decent rally in February, due largely to the cyclical bounce over summer, the chance of rate cuts, and the prospect of further mergers and acquisitions (such as Billabong).

Over the past seven weeks, retailers Harvey Norman (up 12.2 per cent), Myer (up 16 per cent), and the Reject Shop (up 14.5 per cent), have risen substantially. And Kathmandu, the hiking and outdoors retailer, has had its second-best monthly rise since listing on the Australian Securities Exchange in November 2009.

Up 18.9 per cent since February 1, the company has managed to claw back some losses from the preceding three months (-1.8 per cent in November, -29 per cent in December, and -3 per cent in January).

When it had its last profit warning, in December 2010, Kathmandu's shares bottomed out at $1.20. Yesterday its share price closed at $1.51.

Still, fund managers warn the rally needs to be put into context. "The whole sector is coming off a very low base," the head of research at ATI Asset Management, David Liu, said.

"Even though you've had this pretty significant relative outperformance over the February period... Over the six or 12 months leading up to February, it's one of the worst performed sectors in the market."

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Frequently Asked Questions about this Article…

What happened to the S&P/ASX200 and All Ordinaries today and why did Australian shares slip?

The S&P/ASX200 slipped 4.7 points to 4262.7 and the All Ordinaries lost 3.3 points to 4351.2. The local market weakened as investors turned their attention from solid local earnings to the ongoing problems in Greece, combined with a weak lead from US markets overnight. Financial and materials stocks were the main drags on the bourse.

How did the ongoing Greek crisis influence investor sentiment on the ASX?

The Greek crisis distracted investors and weighed on sentiment, prompting a shift away from domestic earnings news. Even though Germany approved a second loan package for Greece (an outcome that was largely expected), the uncertainty around Greece still contributed to a softer local market.

What happened to major Australian bank stocks and what should everyday investors note?

Major banks were weaker in the session. ANZ was the weakest of the big four, down 0.91% to $21.88; NAB was at $21.88; Commonwealth Bank closed at $49.15; and Westpac was at $20.68. Investors should note that financials are a large part of the market (along with materials) and can drive broader index moves.

Why did Telstra shares rise and what does ACCC approval mean for investors?

Telstra shares rose after the Australian Competition and Consumer Commission (ACCC) approved plans for Telstra to split in two and to shut down its copper network, moving about 10 million customers to the Labor government's $36 billion National Broadband Network over the next decade. Market commentators called the ACCC decision a landmark that restored confidence in Telstra and helped lift the telecommunications sector.

How did mining stocks perform and what does that mean for portfolio exposure to miners?

Mining performance was mixed: BHP Billiton was softer at $35.75 while Rio Tinto gained to $67.70. Mining and financial stocks together represent roughly 60% of the Australian market, so their moves have a major influence on the ASX. Everyday investors should remember miners are cyclical and sensitive to global and domestic economic conditions.

Which retail stocks have rallied recently and what drove the retail rally?

Retailers have enjoyed a decent rally: Harvey Norman was up 12.2% over the past seven weeks, Myer up 16%, and The Reject Shop up 14.5%. Kathmandu rose 18.9% since February 1, rebounding from earlier monthly falls. The rally has been driven by a cyclical bounce in domestic activity, the chance of interest rate cuts, and the prospect of further mergers and acquisitions.

What does it mean that 'cyclical' stocks have been re-rated this reporting season?

The article notes cyclical stocks—those that rise and fall with economic growth—have been re-rated higher to reflect a pick-up in domestic economic activity. Goldman Sachs pointed out large-cap industrials with domestic exposure are up about 18% since January 1, outperforming defensive stocks by around 15%. For investors, this means sectors tied to growth have seen stronger recent performance.

Should everyday investors be cautious about the recent retailer outperformance?

Yes—fund managers in the article cautioned that the retail sector's recent outperformance needs context. ATI Asset Management's head of research, David Liu, noted the sector is coming off a very low base and was one of the worst-performed sectors over the prior six to 12 months. That suggests investors should consider whether gains are cyclical rebounds or the start of a sustained recovery.