Stock of the day: Sonic Healthcare
Sonic Healthcare shares took a hit, after Bank of America Merrill Lynch cut the stock to ‘underperform’ and lowered its price target to $22, from $22.90, citing the risk of lower fees. Shares fell 3.9 per cent to $23.34, moving further away from an all-time high of $24.58 they reached last Thursday. The broker expects fee cuts in the US from early 2018, while Switzerland and Germany businesses may face similar issues over that calendar year. The US and German markets accounted for about 40 per cent of revenue in financial year 2016. A slowdown in volume growth to just 2.7 per cent over the past year – from an average of 5.1 per cent over the past 15 years – in its Australian pathology division was another issue worrying the analysts.
Gold prices edged up as tensions on the Korean peninsula stoked safe-haven demand for the metal. “Safe-haven buying re-emerged in the gold market after the latest missile test in North Korea,” ANZ said. “However, traders remain cautious ahead of the impending release of the FOMC minutes, which could give some clarity around the Fed’s next rate hike.” Also profiting from the geopolitical tensions was the yen, which tends to be bought at times of heightened global uncertainty because of expectations Japanese investors may repatriate their foreign investment, despite the country’s proximity to North Korea.
For the first time in a very long time, the euro area is delivering the strongest growth of all the major regions, Deutsche Bank noted. Leading indices such as PMIs are hovering in the mid-50s, showing the benefit of moving past the de-leveraging phase, and credit growth continues to edge up, the analysts said. While the Aussie has risen against the greenback this year, it has actually dropped against the euro, delivering an earnings boost for companies with European operations, they added. Euro-area exposed stocks that Deutsche said were set to benefit include Amcor, Link and Resmed.
Whale of a buyer
A single buyer snapped up all the $800 million of government bonds sold on Wednesday, the largest ever amount bought by one bidder in auctions. The 3.25 per cent notes maturing in April 2029 went off at a yield of 2.72 per cent, the Australian Office of Financial Management said, without identifying the buyer. A bond fund manager suspected a sovereign buyer behind the deal, saying not too many other investors would buy in that size. The sale came a day after government bonds rallied when the RBA dashed speculation it would join global counterparts in talking up policy tightening and flagging interest rate rises.
The local sharemarket has become more vulnerable to rising bond yields, with Credit Suisse estimating that around 22 per cent of the market cap is in yield-senstive sectors, up from 12 per cent little more than three years ago. The broker expects this weight to decline as global bond yields continue their push higher.
This will lead to lower valuations of expensive bond proxies, which are currently trading on 21 times expected earnings, up from 18 times a few years ago, the analysts said. “While we forecast lower valuations we don’t think the big de-rating will come until passive investors re-consider their ‘overweight’ positions in these stocks.”