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CBA hits next record but sharemarket proceeds with caution

Canberra Times logo Canberra Times 26/05/2014 Jared Lynch

Australia's share market has kicked off the week with modest gains, thanks to two of the big banks, while SAI Global surged after receiving a private equity takeover bid.

The benchmark S&P/ASX 200 Index nudged up 20 points, or 0.4 per cent, to 5512.8 points, while the broader All Ordinaries finished 20.1 points up, or 0.4 per cent, to 5490.4 points.

Commonwealth Bank shares hit a new record high, rising 25¢, or 0.3 per cent, to $81.56, while ANZ firmed 7¢, or 0.2 per cent, to $33.67. NAB and Westpac meanwhile eased 5¢, or 0.2 per cent, to $33.52 and 3¢, or 0.09 per cent, to $34.16 respectively.

Despite the top four banks propelling the bulk of a market rally since February, as investors look for high yielding assets, several analysts have called for caution.

According to Morgan Stanley, the risks for the big banks are skewed to the downside. The investment bank said trading multiples are full, volume growth is hard to find and competition is increasing.

''While the probability of material earnings downgrades remains relatively low, we think dividend growth will slow and the potential for a meaningful de-rating is rising,'' Morgan Stanley said in a note to investors.

But not all banks were equal. Commonwealth Bank, the biggest company on the ASX, was Morgan Stanley's bank of preference, saying ''business mix, franchise momentum and cost flexibility will drive above-peer EPS growth and upgrades to consensus estimates, supporting CBA's premium trading''.

In contrast, Morgan Stanley said NAB was underperforming and it with loan loss normalisation complete it expected profit and dividend growth to slow.

Deutsche Bank also has an underweight recommendation for the banks. Analyst Tim Baker said while he was comfortable with the earnings forecast for the top for banks, with about 5 per cent growth, they were too expensive.

''The valuation being paid is too rich in our view, and the sector remains too popular (based on buy/holds/sells, and the most recent data on investor positioning),'' Mr Baker said.

''There is a view that earnings could see upside from the housing boom, but we are sceptical. In the current cycle housing finance has grown only in line with construction approvals, not ahead.

''This means little sign of a leverage cycle, which matters more for banks than a pure construction cycle.''

The ASX also had some help from the mining sector, particularly BHP Billiton, which added 26¢, or 0.7 per cent, to $37.91.

But like the banks, Deutsche has become more cautious of the miners, so much so it has chopped 5 per cent of its end of year forecast for the ASX 200, with its target dropping to 5700 from 6000 points.

Mr Baker is concerned a high Australian dollar and weakening commodity prices will hurt corporate earnings in coming months.

Meanwhile China's momentum remains muted; Europe has disappointed; and sentiment in Australia (both consumer and business) has weakened, partly due to the federal budget.

''Without the cushion of cheap valuations, we are sufficiently concerned to take some risk off the table. That said, we are not moving outright defensive – we continue to expect a stronger earnings environment to emerge later in the year,'' Mr Baker said.

Gold and Nickel miner Regis Resources continued last week's slump, plunging 7.3 per cent to $1.58.

Elsewhere, standards and risk management group SAI Global rocketed 73¢, or 17 per cent, to $5.01 after private equity giant Pacific Equity Partners lobbed a $1.1 billion takeover offer and the company dumped its chief executive.

IG Markets strategist Evan Lucas expected the Australian dollar to play a big role on the performance of equities this week.

Although data is limited for the Aussie, he said capital expenditure figures scheduled to be released on Thursday should be telling.

''At the moment a lot of sectors are suffering a double whammy from slowing growth and a relatively high AUD,'' Mr Lucas said.

''Capex data ... always deserves some attention. As usual, mining and mining services companies will be in focus and could experience some volatility on the data. On the other side of the spectrum, yield plays and other defensive names are likely to continue underpinning the market in the near term.''

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