Update to trade idea: Long Macquarie Bank

The results from JP Morgan in the US highlight are the reason I see further upside in Australia’s only investment bank.

Source: Bloomberg

Trading revenues in JPM’s equities, currency and bonds division saw a significant bounce to revenue and earnings, pushing JPM to an earnings per share read of $1.61 excluding significant items.

Macquarie (MQG) is primed to take advantage of the same event JPM has just experienced. I fully expect Citi, Goldman Sachs and Morgan Stanley to report similar bounces in the current US earning season.

MQG’s advantage over these US names is the AUD – the repatriation of earnings will increase further on the AUD’s weakness. Moves from the Fed or move the RBA will only improve this trade further.

My original reason for going long in MQG was:

AUD/USD shorts are at record all-time highs and momentum in the general market activity is ramping up. I see MQG as a potential trade that can capture all this opportunity in one.

The risk is in current strength, which has seen MQG moving to seven-year highs. However, recent quarterly updates have made a very strong case for a further upside re-weighting.

MQG has benefited from increased activity in funds under management (FUM), asset deals and banking over the past 18 months. However, recent activity in the European and US markets has seen its transaction-based businesses – particularly its fixed income, commodities and currency (FICC) division – returning to double-digit revenue and EPS growth, which in turn is further ramping up FY15 expectations.

MQG also has perfect exposure to increased movements in currencies and commodities due to the fact it receives a substantial amount of its revenue in USD. CEO Nick Moore has a habit of under-promising and over-delivering. In his previous five updates, all have been to the upside.

With a weaker AUD, low global interest rates, rising asset prices and improving operating conditions, MQG looks to be a perfect way to take advantage of both the moves in the markets and USD appreciation.

This still holds true and, even with the 7.5% move to the upside, I see value here and have updated my trade to reflect MQG’s position.

My trade idea

I’ll be looking to buy MQG on dips. I have raised my stop loss to $80 to further protect profits. I would re-enter the trade on price point inside the $70 handle.

I have again lifted my limit as I want to let my profits run. I have therefore raised my limit from $83.60 at last my assessment to $84.44 – the top of the resistance channel. I continue to monitor the current trade closely and may alter it further still.

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