MARKETS SPECTATOR: Sellers unleash some value

UBS strategist David Cassidy is cautious on the Australian market but says recent selling has seen some value return, with miners and retailers among the bargains.

The chief Australian strategist for UBS, David Cassidy, reckons the 4.9 per cent drop in the benchmark S&P/ASX200 Index since May 14 has “restored a bit of value” to the market.

But Cassidy is hardly a bull. Unlike his rival at Citigroup Tony Brennan, who yesterday raised his year-end target for the index to 5400 from 5200, Cassidy is keeping his forecast for the S&P/ASX200 Index at 5250.

The index is now trading about 14 times forecast earnings, slightly below its 20-year average of 14.4 times, Cassidy told Markets Spectator. He says the market is “fair value” and suspects it will trade around these levels. At 1202 AEST the S&P/ASX200 Index had inched down 0.452 of a point, or 0.01 per cent, to 4970.20.

But Cassidy cautions that foreign fund manager selling, which reached a crescendo last week, is continuing. The 7.8 per cent drop in the Australian dollar against the US currency this month – it was trading at $US0.9559 at 1202 AEST – signals a loss of confidence in the prospects of the Australian economy.

“The domestic picture has softened,” says Cassidy, citing a lack of business and consumer confidence, anaemic retail sales, a cooling in capital spending and disappointing employment numbers.

But the sliding Australian dollar may “clearly help earnings" of some Australian companies, says the UBS strategist, while further rate cuts may underpin sales for some. Cassidy’s stock picks include iron ore miner Rio Tinto, explosives and chemical maker Orica and retailers Harvey Norman and JB Hi Fi.

“Miners including Rio may have been thrown out with the bathwater,” says Cassidy. If mining now is all about ever-increasing levels of production then the demand for explosives may increase, he adds. Further interest rates cuts by the Reserve Bank and an increase in house prices may bolster consumer confidence and benefit Harvey Norman and JB Hi Fi, concludes Cassidy.

At 1204 AEST Rio shares were up $1, or 1.9 per cent, to $53.85. Orica had gained 19 cents, or 0.9 per cent, to $22.29. JB Hi Fi had added 49 cents, or 3.3 per cent, to $15.52. But Harvey Norman was down 3.5 cents, or 1.4 per cent, to $2.535.

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