Weak leads from the US may soften Asian markets
City Index April 25, 2012 4:50 AM
<p>Asian stocks are expected to soften today given weak offshore leads. Overnight, the S&P500 index shed 0.8% while the Dow Jones Index was off by […]</p>
Asian stocks are expected to soften today given weak offshore leads.
Overnight, the S&P500 index shed 0.8% while the Dow Jones Index was off by a similar amount.
Fresh concerns around Europe dominated headlines. Corporate reporting has so far met expectations in the US but there haven’t necessarily been any large earnings upgrades.
Facebook’s profit was lower for the first quarter but this was admittedly on higher IPO related costs. The business is on track to list sometime next month. Price and terms have yet to be finalised.
The Australian dollar was soft ahead of today’s inflation reading, it last traded at 1.0316 against the US dollar. Market expectations are for inflation to come in at 0.6%.
The Euro was last trading at 1.3153 while the US dollar last traded at 81.15 against the Japanese Yen.
Commodities were lower but copper remains in the US$3.60-65/lb band we have been watching now for some time. Gold continues to decline, last trading at US$1638/oz with little safe haven buying amid sovereign debt concerns starting to creep back into the market, albeit only slightly.
Newcrest downgrade, perfection fails to deliver
Australian listed Newcrest Mining released its quarterly production result this morning Asian time. It has reduced its production guidance for 2012 from 2.43-2.55 million ounces to 2.25-2.35 million.
The downgrade might not sound like much on face value but Newcrest is a stock that trades on a very high earnings multiple, with a gold premium built in.
The lower production numbers combined with a falling gold price is likely to hurt earnings estimates which will no doubt be under pressure today. The big problem around this downgrade is doubts around the quality of its Lihir acquisition.
Acquisitions are always difficult and Lihir had a history of burning cash but the hope was that the worst was behind it and Newcrest would bring about better days.
The lesson here is in investing in businesses that are priced for perfection. Prior to this downgrade, Newcrest was trading on a 2012 Price/Earnings ratio of around 17x. This is despite the shares falling by more than 10% over the past few months.
Meanwhile emerging gold producers – sometimes referred to as juniors – are trading on multiples of around half that. For this reason, we think consolidation among the juniors, the producers in particular, will ramp up this year as the market needs a large exposure which can rival Newcrest. There is a large list of Australian gold producers which will stay very profitable even if the gold price continues to decline.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.