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Strong rally ahead?

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Published on: Saturday, August 07, 2010

The market continues to take us on a rollercoaster ride. To give us his take on what’s going on in the markets, and his sector pick, Justin O’Brien from Morgan Stanley Smith Barney joins Peter Switzer on his Sky News Business Channel program – SWITZER.

O’Brien says Morgan Stanley have a target of 5200 for the end of the year for the S&P/ASX 200 and Citigroup gas 5,500 – “that would actually mean quite a strong rally,” he says.

Rio recently reported better than expect numbers with very strong cash flow, but what’s important behind the numbers is the $4 billion that came out of iron ore, says O’Brien. And that’s thanks to China and India.

“It’s that industrialisation that’s really saved a lot of the Australian corporates because mining is such a big part of the S&P/ASX 200 – it’s 25 per cent of the index, it is a large contributor. It’s a sexy industry to be in because you’re getting top line sales, you’re getting sales quality and there’s actually momentum behind. Just look at the prices.”

He also says there’s a lot of facts about China that has the world “mesmerised”.

Strong dollar

So why aren't the share prices of BHP and Rio picking up a bit?

O’Brien says there are two reasons: August has the current reporting season as well as an election.

He explains there has already been a strong rally in the Australia dollar. In April, the Australian dollar was buying 90 to 92 US cents, it then went down to 82 “in the depth of the sovereign crisis in Europe. Now, it’s just under 91 US cents.

“So that risk trade is back on, and the risk trade is they switch out of currencies like the US dollar, the euro and also to the Japanese yen, believe it or not and you actually buy the commodity currencies – the Canadian dollar, the Australian dollar for resource exposure.”

Sector picks and misses

O’Brien says going into the reporting season, he likes resources, coal stocks and iron ore stocks.

“What I like about it is there are a number of supply constraints that will actually keep prices up – there’s strong demand coming out of the emerging markets,” says. “I think that that sector – it’s a sector not to be ignored.”

And the sector that concerns O’Brien is the banks, “particularly with a lot of the offshore managers questioning affordability.”

“The banks are worried about home ownership and also too the excessive leverage that Australian households have.”

Check out Peter Switzer’s SWITZER on Sky News Business Channel, Monday to Thursday from 7pm.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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