July 2 (Bloomberg) -- The biggest decline in Australian energy companies since 2010 dragged equities to their first quarterly loss in a year.
The S&P/ASX 200 Index dropped 4.8 percent to 4,608 and dipped to as low as 4,451.7 on June 20, down 10 percent from its April 11 high to complete a so-called correction. Energy stocks led the retreat, falling 11 percent on average and matching losses in oil futures traded in New York. Financial firms led by Bank of Queensland Ltd. dropped 4.6 percent amid the highest interest rates in the developed world.
Australian shares are being squeezed by government attempts to curb inflation at home and in its biggest export market, China, and a 27 percent gain in its currency against U.S. dollar in the past 12 months, which makes products more expensive to overseas customers. Australian banks slumped as demand for mortgages, accounting for 63 percent of outstanding loans, grew at the weakest annual pace in 34 years.
“On top of all these global worries, Australia has its own overlay of factors that explains why our market is down more compared with global averages,” said Sydney-based Shane Oliver, head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management.
The Reserve Bank of Australia, which has lifted official interest rates by 1.75 percentage points since October 2009, said in a May report that further increases are likely to be needed in order to contain inflation. Australia’s benchmark interest rate, the overnight cash rate target, is 4.75 percent compared with near zero in the U.S.
BHP Billiton Ltd. and Woodside Petroleum Ltd. helped lead declines in energy producers that were twice as large as in the rest of the world, on average, according to data compiled by Bloomberg. BlueScope Steel Ltd., Australia’s biggest steel producer, slumped 39 percent.
BlueScope’s slump deepened after May 12, when the company said the stronger dollar and “demand weakness” in domestic pipe and tube markets mean it will report a net loss in the second half of the financial year, rather than breaking even.
The MSCI World Index overall lost 0.3 percent in the quarter, while the MSCI Asia Pacific Index fell 0.6 percent.
“The strong Australian dollar has made exporters less competitive, while the whole equity market struggles with interest-rate rises,” said James Holt, Sydney-based director of BlackRock Investment Management (Australia) Ltd., which oversees about $40 billion. “On the other hand, we may be near the end of the interest-rate cycle, and much of the dollar’s rise might now be done, so it’s possible to be constructive.”
BHP Billiton, the world’s biggest mining company and Australia’s largest oil producer, dropped 5.9 percent in the quarter, the biggest drag on the benchmark index. Rio Tinto Group, the No. 2 mining company by sales, retreated 2.1 percent.
Rio Tinto said June 28 that the rising Australian dollar and labor shortages were pushing up costs and putting pressure on project expansion.
“From a financing viewpoint, we are seeing some projects overrunning their costs,” Sam Walsh, chief executive officer of the London-based company’s iron ore unit, told reporters after a business presentation in Perth. “All this means the projects are going to be harder to bring on.”
BHP said on June 24 that the dollar and “broader inflationary pressures” contributed to raising the cost of expanding its Worsley aluminum project in Western Australia state by more than half.
Woodside, Australia’s second-biggest oil and gas producer, slumped 12 percent, while Santos Ltd., the third largest, slid 13 percent.
Mining companies sank as an index of metals traded in London dropped 3 percent through June 30, driven by reports showing that manufacturing growth in China, the U.S. and Europe slowed in May. Speculation that rising inflation may prompt Chinese authorities to raise interest rates cut the shares.
Uranium miners Paladin Energy Ltd. and Energy Resources of Australia Ltd. tumbled more than 30 percent as the crisis at Japan’s Fukushima Dai-Ichi nuclear plant continued to roil the global nuclear-energy market. Paladin’s valuation, at 1.6 times its assets, has fallen so much it may become a takeover target, Citigroup Inc. said in a June 21 report.
Fitch Ratings Ltd. cut Greece’s credit rating and Standard & Poor’s said Italy’s was at risk, deepening concern over Europe’s sovereign debt crisis. The U.S. Federal Reserve reduced its outlook for U.S. growth and said it will conclude its current round of asset purchases at the end of June, adding to worries that the global economy will slow.
Westpac Banking Corp., Australia’s second-largest lender by market value, declined 8.5 percent in the quarter after Moody’s Investors Service lowered its rating on Australia’s four largest banks to Aa2 in May, its third-highest grade and the first downgrade of the country’s biggest lenders in more than a decade.
Australia & New Zealand Banking Group Ltd. dropped 7.6 percent. Chief Executive Officer Mike Smith told Australian Broadcasting Corp. television on May 8 that credit growth won’t return to the pace seen before the global financial crisis as businesses and households boost savings and cut debt. ANZ is the worst performer among Australia’s four largest banking stocks this year.
Valuations for Australian stocks have fallen to 16.1 times reported earnings, a 15 percent drop from this year’s high of 19, according to data compiled by Bloomberg. Stocks in the S&P/ASX 200 are valued at 13.5 times estimated earnings on average, compared with about 12.8 times on the world benchmark and 13.8 times on the Asian gauge.
“If you had the dry powder available, you’d be very happy to be able to deploy it now,” said Prasad Patkar, a money manager who helps oversee about $1.7 billion at Platypus Asset Management Ltd. in Sydney. “When we look back at this market in a year’s time, it will prove to have been a great buying opportunity.”
--With assistance from Lynn Thomasson in Hong Kong. Editors: Nick Gentle, Andrew Rummer
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