Market volumes remain low and buying interest from the large end of town appears to have subsided, with the ASX 200 back around the 5,250 mark. Our core contention remains that the market will continue to trade in a band of 4,900-5,300 points. The market seems to be wedged between a weak global backdrop, and a domestic backdrop that may look worse in six months as housing slows. Selective stock selection remains the best strategy at these levels, and using out of favour companies remains the most prudent way to generate long term returns (recent examples Medibank, Perpetual, Woodside and Woolworths). The current basket that stands out is CSL and Telstra. Both companies appear to be attracting heavy selling in this market, with Telstra testing $5.30 yesterday (forward PE 14.36 and yield 5.74% (fully franked). Short term sentiment is driving the current price action (most likely wholesale repricing), however there is clear value emerging at these prices.
The other observation that is worth making is that Australia continues to trade as a developed -emerging market, and there are few signs that this correlation is disappearing. A resumption in emerging market weakness (China) linked to FX and commodity price weakness, would drag the local market lower irrespective of domestic growth fundamentals.
Figure 1- 30 day move in CSL & Telstra