Asian markets rebound strongly Australia reports stronger than expected GDP

Regional stocks were higher today having suffered large losses over the past few trading sessions. The MSCI Asia Pacific Index added 1.6% at noon in Tokyo. The KOSPI 200 was the standout, up over 3% in late afternoon trading. Markets took comfort in Standard & Poor’s 500 Index futures pointing to a 0.6% gain. 

Australian shares were 2.2% higher in late afternoon trade, buoyed by a strong GDP release. Second quarter GDP grew at 1.2% which was higher than market expectations of around 1%. Not only was the second quarter number above expectations but the first quarter decline of 1.2% was revised slightly higher to a 0.9% decline. In seasonally adjusted terms, manufacturing added 2.8%, which will surprise many given the bleak stream of corporate news in that sector over the past few months. 

What’s caught our interest is the 4.4% rise in transport, postal and warehousing – perhaps a sign that internet shopping and greater use of international trade channels is not all bad news, creating jobs for those which deliver the goods to customer’s households. Strong gains in inventories and consumption offset a 0.5% decline in net exports but this should reverse towards the third and final quarter of the year. The release came just minutes after RBA Governor Glen Stevens again explicitly talked up the prospects of the Australian economy, the region is operates in and the desire to keep rate policy flat. 

We don’t see a rate rise anytime soon the back of these numbers and think the bond market will re-price rate assumptions quiet quickly on the back of these numbers. Overall, Australian remains a bright spot in an otherwise bleak global economic backdrop. 

Corporate news remains quiet in Australia. Macquarie Group hosed down market expectations for earnings growth this year, pointing to weak trading markets and uncertainty which will see first half profits lower. The investment bank hopes the second half will be better but we think market expectations of 8% growth for this year compared to last are too optimistic and will most likely be revised down by market analysts in coming days. 

Macquarie was also subject to speculation this week that it was eyeing RBC’s aircraft leasing business in a deal potentially worth up to US$8bn. The market is used to seeing aggressive acquisitions by Macquarie for globally strategic assets and businesses. A large and significant deal like RBS would signal the group’s willingness and capacity to remain competitive. Shares in Macquarie traded flat despite the overall market rise. 

In aviation, Virgin (VBA) announced a 10.4% increase in revenue passenger kilometers for July. International traffic grew 3.85 mainly due to new flights to Abu Dhabi. Our preference remains towards Qantas which also booked strong numbers for July. Qantas is trading at a very significant discount to its book value and while the jury is still out on the success and implementation of its internationals strategy, the recent fall in fuel prices should help stabilise margins as capacity improves. Compared to Virgin, Qantas is a lot more profitable in absolute terms and has the balance sheet capacity to grow its business substantially across Asian, not just through code sharing arrangements. Qantas and Virgin shares were last trading higher in line with the overall market rise.