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Markets sell off into end of quarter

James Gerrish

Market Matters

A choppy session for end of month / end of quarter trading with the usual end of period window dressing failing to materialise today. Normally we see big underperformers for the period being cut by fund managers so they don’t need to explain them away in quarterly performance reports, while the winners are often added to, particularly if a fund has held small weightings through the period and they want to show them as being more material…or perhaps I’m being too cynical here?

The market opened lower this morning, but only marginally so before a 1pm high at 6734 was put in. From then on it was all one way traffic with the market selling off for the afternoon, down ~50pts from the earlier highs + on the lows of the session. A very weak close for the quarter on big volume with a lot of market on close portfolios going through + big volume in the futures market (4k lots) which is a big line.

On the stocks / sector side today, Energy was best on ground today led by Woodside (WPL) which was up +1.09% while the IT stocks were weak following on from weakness in US based tech stocks Friday night, Appen (APX) trading back to our targeted ~$21 level, a pullback of more than 30% - bucking the weakness was Z1P Co (Z1P) today which put on +9.41%. Other standouts were Nufarm (NUF) which put on +26%, Harry covers below while Fruit & Veg supplier Costa (CGC) also had a good session up more than 6% today.

Overall, the ASX 200 lost -27pts today or -0.41% to 6688, Dow Futures are trading up +71pts / /+0.26%.

For the month, the ASX 200 added +1.27% while it was up +1.05% for the quarter. Stocks of note during September included Bellamy’s (BAL) which added +73% on a takeover, Premium Investments (PMV) +30% on a good earnings result, IOOF (IFL) +26% on a positive court ruling against APRA, Western Areas (WSA) +25% on Nickel supply issues while Costa Group (CGC) +19% bounced back after a poor result the prior month. On the flipside, Pro Medicus (PME) was whacked +24% and CYBG (CYB) lost another 18% as the poor trend of performance continued for the UK based bank.

No change to our current view, with the ASX200 trading above the 6700 area, we’re comfortable being relatively defensive, at least for a few weeks / months.

ASX 200 Chart

ASX 200 Chart


Quarterly Performance: Materials the weakest sector although Western Areas (WSA) was the strongest stock in the period thanks to supply issues in the Nickel market. The defensive staples sector which includes Coles (COL) & Woolies (WOW) had a great 3 months while the Tech stocks were strongest early before a number of them came off the boil. The high growth trade became a lot more stock specific during the period.
In terms of generic index valuations, the S&P/ASX 200 is trading at a price-to-earnings ratio of 19.5 on a trailing basis and 17.2 times estimated earnings of its members for the coming year. The index's dividend yield is 4.6 percent on a trailing 12-month basis



Nufarm (NUF) +26.46%; the crop protection company rocketed higher today on their FY19 results as well as announcing the sale of their South American arm to Japan’s Sumitomo for $1.2bn. The deal will see Nufarm give up around 25% of their profit, valuing the sold business on 10x FY19 EBITDA. The deal will see Nufarm’s stretched balance sheet vastly improve with over $950m from the proceeds to be used to pay down debt and reduce their capital costs by $60-70m/pa . Net debt fall to 0.7x EBITDA, down from 3x, falling back below their targets. The Nufarm board has unanimously recommended the deal if no superior offer comes forward saying the capital release will allow the company to focus on higher margin and stronger growth opportunities.

FY19 results were broadly above analyst forecasts with sales at $3.76b a 7.5% beat and EBITDA of $420m marginally better than expectations. Shares were seen as high as 55% better than Friday’s close before NUF gave up around half of the move as the session rolled on. The volatility today was assisted by the sizable short interest in NUF, which as of Thursday had the highest percentage of short interest in the top 200 at 17.71%.

Nufarm (NUF) Chart

BROKER MOVES; FMG underperformed today thanks to the below downgrade. Iron Ore was up +3% in Asia supporting a good run in RIO which put on +1.17% versus FMG which fell -0.23% to close at $8.80

· Fortescue Downgraded to Underperform at Credit Suisse; PT A$7.50

· Sydney Airport Rated New Underperform at RBC; PT A$7.50

· Westgold Rated New Outperform at Macquarie; PT A$3.50

· Webjet Downgraded to Neutral at Credit Suisse; PT A$11

· Northern Star Upgraded to Neutral at Goldman; PT A$11.20

· Saracen Mineral Raised to Buy at Argonaut Securities; PT A$3.50

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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