Evening Wrap: ASX 200 recoups early losses, iron ore prices fall on Chinese property woes

The Index recovers from another weak start, iron ore miners struggle to bounce with the rest of the market as Chinese property developers tumble over concerns of a possible Evergrande liquidation, Qantas near fresh 52-week lows as the company faces a pricey fuel bill and UBS' take on stocks in the financials sector.

Let's dive in.

ASX 200 Session Chart

ASX 200 rallies off session lows to close slightly positive (Source: Market Index)

Markets

The ASX 200 finished around breakeven, up from session lows of -0.65%. The Index is putting up a fight but pretending to jump out of the window for a second straight session isn't very comforting. Overall, it's the bearish narrative that continues to dominate markets, with a focus on higher rates and renewed pessimism around China. Let's see if the market can stick things out as we head into the more seasonally comforting month of October.

• Technology Index snapped a five-day losing streak, supported by broad-based gains from Technology One (+4.0%), Megaport (+3.3%), Xero (+2.0%) and Wisetech (+1.6%)

• Real Estate also broke steep a five-day losing streak where it fell 4.4%

• Materials led to the downside after a slew of negative headlines from China (we'll recap some of these developments in detail below)

Economy

No major economic announcements.

Latest news

Iron Ore Miners Under Pressure

Iron ore miners BHP (-0.4%), Champion Iron (-1.0%), Rio Tinto (-1.2%) and Fortescue (-1.3%) somewhat struggled as the rest of the market bounced.

China has been dishing out some light stimulus over the past couple of weeks, which has kept the market relatively happy. But we're starting to see headwinds resurface in the form of:

• Moody's downgraded the outlook of several Chinese state-backed property developers amid "high uncertainties" and the "uncertain recovery prospects for China's property market."

• The ratings agency also downgraded its outlook on seven other builders

• Government data last week flagged that China home prices dropped at a faster pace in August, down 0.29% month-on-month from a 0.23% fall in July

• Evergrande shares fell 20% on the Hang Seng on Monday after it said it's unable to issue new notes under its debt restructuring plan due to a probe into its subsidiary Hengda Real Estate Group

• Bloomberg's gauge of Chinese developers also fell as much as 6.4% on Monday

• Singapore iron ore futures are currently down 4.5% to US$115.6 a tonne

We've seen plenty of these China crisis episodes. Will this be another one that rocks the market for a couple of weeks or months (and then patched by stimulus)?

Qantas in Freefall

Qantas shares are a bit of a sinking stone at the moment, down another 1.5% on Monday to a near 12-month low.

It's trading update today flagged a classic airline issues (higher fuel costs, investment into better service and capex) alongside recent negative publicity. Here are the key highlights from the update:

• Customer improvements: A further $80 million (on top of the already $150 million budgeted) to improve various customer pain points

• Travel demand: "Trading conditions in the first quarter of FY24 similar to the last quarter of FY23."

• Fuel costs: Fuel prices up around 30% since May 2023. "If sustained, this is expected to see the Group’s 1H24 fuel bill increase by approximately $200 million to $2.8 billion after hedging."

Qantas 12-month price chart (Source: Market Index)

Interesting news and movers

Trading higher

• +6.7% Starpharma (SPL) – Completes recruitment for clinical trial

• +6.0% Imugene (IMU) – Completes SPP

• +3.0% AGL Energy (AGL) – Upgraded by Macquarie

• +2.9% Lucapa Diamonds (LOM) – Exploration update

Trading lower

• -12.0% Strandline Resources (STA) – MD resignation

• -1.4% Sigma Healthcare (SIG) – Ex-dividend

Broker notes

UBS on Megaport:

• Downgrade to Sell form Neutral with $20.00 target price (from $22.00)

• “We adjust our EPS forecasts by +0.8%, -5.0% and -9.0% (FY23-25E), driven by a significantly higher cost outlook, somewhat offset by lower than initially expected credit charges as the asset quality cycle now appears more benign.”

• “ROE is now expected to compress by ~140 bps to FY27E, with downside risk, in our view. Despite the stock at close to trough valuation multiples, we think the market has yet to fully price in these cost overruns/ ROE compression.”

UBS on Australian Diversified Financials: 

• “Industry net funds flows (NFF) recovered after a weak March qtr, and anecdotally we understand that momentum has continued into Sep23 qtr. Specialist platforms (SPPs) continue to outperform incumbents' NFF by some margin.”

• “The industry data release supports our view that the retail wealth platforms industry continues to fragment.”

• “We believe that the growth runway for SPPs is very long, and despite several years of strong growth, NWL and HUB penetration levels remain low.”

• “At this stage, we prefer NWL over HUB; this reflects our view that NWL has lower near-term flows expectations, lower cost growth and no integration distractions.”

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