Evening Wrap: ASX 200 gives back early strength + China's producer prices tumble

The Index tumbles from a positive start, China's underwhelming consumer prices signal weak economic growth, gold stocks catch a bid, Morgan Stanley initiates upbeat coverage for ASX-listed insurers and UBS expects ASX 200 EPS to fall 3.2% this year.

Let's dive in.

ASX 200 Session Chart

ASX 200 fades early gains to finish at worst levels (Source: Market Index)

Markets

What a miserable day for the Index. The session started strong, with the ASX 200 up 0.6% but momentum was in the opposite direction. The key drag on markets was China's underwhelming inflation where, most notably the sharp decline in producer prices, which was -5.4% year-on-year in June. This marks the fastest rate of decline since December 2015. A heavyweight name like BHP was up 1.2% in early trade, slumped to around -0.3% after China's inflation print at 11:30 am AEST and spent the rest of the day trending lower, finishing down 1.1%.

We've been noting the pick up in volatility in the past few sessions and what was supposed to be a bounce back session turned into another tumble into no man's land. The market remains in a challenging spot as it tries to juggle renewed higher-for-longer narratives (thanks to strong US economic data), China's deflation problem as well as US earnings season (which kicks off this week).

Economy

China’s inflation rate fell to 0% in June from 0.2% in May.

• Below expectations of inflation staying unchanged at 0.2%

China’s producer price index decelerated to -5.4% in June from -4.6% in May.

• Below expectations of a fall to -5.0%

• Marks the ninth consecutive decline in annual producer prices

• Likely heightens expectations of more forceful stimulus from a Politburo meeting later this month

Latest news

Interesting news and movers

Trading higher

• +11.7% Vista Group (VGL)

• +9.9% Melba Energy (MAY)

• +8.4% Leo Lithium (LLL)

• +5.4% Cettire (CTT)

• +4.6% Talga Group (TLG)

• +4.1% Meteoric Resources (MEI) - Expansion of Caldeira REE Project

• +4.0% Monadelphous (MND)

• Gold sector move: Westgold (+5.3%), Bellevue Gold (+5.1%), Northern Star (+1.8%), Gold Road (+1.7%), Newcrest Mining (+1.1%)

Trading lower

• -14.5% Nexted Group (NXD) - FY23 Guidance

• -5.5% Strandline Resources (STA) - Seventh shipment of HMC completed

• -6.7% Macmahon (MAH)

• -3,8% PointsBet (PBH)

• -3.3% MetalsX (MLX)

• -3.1% Tabcorp (TAH)

• -2.9% Arafura Rare Earths (ARU)

Broker notes

Morgan Stanley on Insurance Brokers:

• “We initiate on the insurance brokers with a positive stance. We find the industry dynamics in broking attractive, despite the recent increase in multiples.”

• “They offer strong operating leverage with no balance sheet risk and capital-light business models, making them relatively defensive and high growth at the same time.”

• “Trading multiples of 17-23x FY25E P/E (UNPAT) or 15-21x (UNPATA) are reasonable in light of projected 10- 17% EPS growth.”

• “We initiate AUB at Overweight. We think AUB has the best opportunity for earnings growth and yet is cheap vs peers.”

• “We initiate PSC Insurance Group at Overweight: PSI offers attractive medium-term growth & its "one-team" model drives above-peer margins.”

• “We Initiate Steadfast Group at Equal-weight: SDF is a strong beneficiary of the hard pricing cycle and has a dominant position in the Australian market with its leading domestic broker network, but we think the valuation is full.”

UBS on earnings expectations:

• Company downgrades to forward earnings estimates have “slightly” outnumbered upgrades in the past four weeks

• The magnitude of disappointments have been noticeable and UBS has downgraded ASX 200 year-on-year earnings growth by 0.6% and 1.4% for FY23 and FY24 respectively

• FY24 ASX 200 EPS growth forecasts now sit at -3.2% year-on-year

• “Worryingly, we note that previous recession periods saw the Consumer Discretionary and Bank sectors post earnings growth reversals of more than 10% year-on-year.”

• The investment bank suggests owning the sectors detached from recession risks, including a) exposure to non-cyclical channels (e.g. overweight Technology and Insurance) and b) exposure to income equities that pay high and stable dividends (e.g. overweight infrastructure, utilities and insurance)

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