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The ASX (in AUD terms) was the best-performing developed market globally last week. The reasoning behind this is likely to be down to two factors: volatility collapsing on central bank expectations and the fact that yield in AUD or even USD is the highest in the Asian world.
What’s caught my attention
ASX added 4.1% best week in a year. The AUD added 1.2%, however the commodities index fell 0.8%. It’s down 6.4% in November alone and is at 1999 lows – the disconnect here is amazing.
AUD shorts in the futures market climbed to 66,000 contracts on Tuesday. The contract data for the second part of the week is due out today, however considering the incredibly strong rally in the AUD and the NZD from Wednesday, it will be a question of how many short positions were shaken out and if it will be reinstated this week.
The ASX is still 4% down for the year in local currency terms (down 12% USD), yet having seen the rally strength last week, the supposed ‘Santa Clause’ rally in equities looks fairly certain to materialise this year on last week’s bid strength and developments in the US. That’s despite the fact that the underlying market conditions haven’t changed week-to-week. This is going to put a premium in the ASX that will likely see it under real pressure in the January.
ASEAN markets except Indonesia (which was the second-best index in the region) continued its mass underperformance as Singapore continued to languish in the bottom two worst-performing developed indices along with Canada.
The emerging markets (EM) divergence drag has yet to affect the ASX. However, as more and more fund flows exit EMs on the Fed’s gradual rate increases and the risk premium continues to develop on the divergence between equities and commodities, that trend is likely to reverse. The cumulative fund flows since 31 December of Asia-Pacific developed markets versus Asia ex-Japan hit a year high last week.
Fundamentals remain eye catching for the mismatches they are creating too. The ASX’s EPS consensus expectations 2015 are for a 5% decline with only 3% growth in 2016. The ASX’s forward blended P/E for 2016 is 15 times its P/B at 1.7 times. Both have it in the top four of Asian markets (excluding Japan) and would see it above the historical trends in both metrics. Its yield of 5% sees it having the highest income return in all of Asia, however that includes the current expectations of cyclical firms such as BHP maintaining its current dividend policy.
Ahead of the Australian Open
Ahead of the open, we are calling the ASX up 11 points to 5265 on the strong finish in the US on Friday. However, BHP’s ADR is pointing to a 2% decline as it looks to test the $20 mark again. Iron ore fell to the low of the week on Friday night of US$44.91 a tonne and the second lowest read of the year. Brent however registered its first positive week since October, yet is still sub-US$45 a barrel. Banks and defensive stock are going to have to do a lot of heavy lifting to see the ASX in the green this week.