Stocks savaged in $30bn wipeout

THE sharemarket faces a tough time clawing back from yesterday’s $30 billion rout, and analysts expect protracted weakness in commodity prices.

THE Australian sharemarket is expected to have a tough time clawing back from yesterday’s $30 billion rout, with analysts expecting protracted weakness in commodity prices, putting the ­resources sector under pressure.

Yesterday’s 2 per cent fall in the S&P/ASX 200 was its biggest one-day decline in seven weeks, yet the market’s two-day fall of 3.6 per cent was its worst in more than two years.

Australian shares continue to underperform offshore markets this year, as the dollar adjusts to lower commodity prices and the increasing chance of another interest rate cut.

The S&P/ASX 200 is down more than 2 per cent this year versus a 5.2 per cent rise in the Morgan Stanley Capital International World index and a 14 per cent rise in the US’s S&P 500.

“Last month, every major Australian sector underperformed their global counterparts, so the problem seems to go beyond simply the resources stocks weighing us down,” UBS Equities Strategist Dean Dusanic said. “It does appear that there has been a generalised sell-off of Australian equities, so it may be indicative of an asset allocation shift out of Australia.”

Reflecting a flow of money offshore, the dollar has fallen 11 per cent since June. Yesterday, the exchange rate hit a four-year low of US84.17c.

More disappointment with China’s economy added to the gloom, as two gauges of factory activity indicated manufacturing had lost momentum despite a recent cut in interest rates.

China’s official measure of manufacturing activity slipped to its lowest showing since March, while a private gauge compiled by HSBC and research firm Markit touched a six-month low, according to data released yesterday.

“The PMI data suggests that fundamentals are still very weak,” Macquarie Group economist Larry Hu said. “Investment in property and manufacturing remains weak, so the government is the only one spending. And when government spending wanes in the winter months, the economy falls off,” in part due to cold weather affecting construction projects.

“The rate cut probably isn’t enough,” said HSBC economist Julia Wang of the surprise cut by the Chinese central bank last month. “We think there will be more easing needed given the economic situation.”

The sustained sell-off in the sharemarket since Thursday is primarily due to a 13 per cent plunge in oil prices after OPEC failed to agree on production cuts, but there’s a growing risk of other commodities following oil and iron ore.

That was evident in BHP Billi­ton’s share price yesterday as it fell below $30 for the first time in five years. BHP closed down 5.3 per cent at $29.27.

“There was an obvious capitulation of bulls on BHP and there could be more to come,” said Morgan Stanley wealth management investment adviser Shannon Briggs.

Although less than 25 per cent of BHP’s earnings comes from oil, BHP’s share price chart is starting to look eerily like the oil price, and that may be because other commodities are starting to correlate with oil.

Analysts are increasingly expecting crude oil to test its global financial crisis low of $US40 a barrel, and while few expect BHP to fall much further, its equivalent low was $20 a share.

Elsewhere, Santos looks likely to be hardest hit if oil prices stay low for more than 18 months.

UBS warned that there were increasing risks of Santos selling assets — at the wrong time of the cycle — or undertaking a dilutive capital raising if its investment-grade credit rating came under pressure.

“We expect further oil price volatility; it’s hard to pick the bottom, but we could be in for a period of sustained low prices,” UBS energy analyst Nik Burns said.

One bright spot remains transport companies, which continued to benefit from lower oil prices. Qantas closed up 4.7 per cent.

Elsewhere in the region, Japan’s Nikkei 225 rose 0.8 per cent yesterday after a 6.4 per cent rise last month.

China’s Shanghai Composite was flat after rising 11 per cent last month. But Hong Kong was down 2.6 per cent.