Targets and valuations

The start of the National People’s Congress has thrown up no real surprises in its targets for 2015.

Source: Bloomberg

However, the reaction in industrial commodities market was stark.

China’s key growth targets for 2015:

- GDP growth target around 7%

- CPI target around 3%

- Budget deficit 2.3% of GDP

- Fixed Asset Investment Growth estimated to be 15%

- Retail sale estimated to be 13%

- Looking to improve local government debt-raising mechanism and M2 growth is expected to be around 12%

This was all very much expected; there were no major shocks or overly ambitious or pessimistic views. The conclusion most draw is the further stabilisation of the growth rate and property market is likely to see a few more reductions in the reserve requirement ratio and cuts in interest rates. However, in the main, the likelihood of cash stimulus according to the People’s Bank of China officials quoted yesterday is remote and the central government is content on its current path.

Yesterday’s announcements were further signs the central government is continuing its structural reforms announced at the Third Plenum back at the end of 2013. The government is very clearly moderating expectations and steadily controlling the fiscal policies to avoid the ‘ever forecasted’ hard landing.

However, yesterday’s confirmation of the already leaked target outlooks saw a plunge in industrial metals. Iron ore for delivery into Qingdao made a new record low according to Metal Bulletin, printing a sub-US$60 tonne a read for the very first time of US$59.73.

This move is going to hit materials hard. This week alone has seen the material sector falling 3.25% and that is likely to be lower still come the close of business today. The interesting situation that may arise out of the slide in material stocks is that it brings dividend yields the likes of BHP Billiton Ltd and Rio Tinto Ltd back above 4.8% and well above the ASX’s current net average yield of 4.25%.

There is a cautionary development here - the thirst for yield is blinding the market to frothy valuations.

All expect the cash rate to go lower - according to the interbank market, come May rates will be 2% (currently estimating a 98.67% chance of a rate cut). However, Philip Lowe’s speech yesterday is suggesting that interest rate cuts are not having the same effects on the economy as they once were.  So does that mean February’s cut was a lone wolf move as the RBA may have to look to other measures to stimulate the sluggishness seen in the market?

If we take the scenario that the rate cycle has already ended, then we have an interesting dilemma in the ASX 200.

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