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Reserved Bank Of Australia Statement and China's Political Instability

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This Invast Insights report touched on three important topics - the Reserve Bank Of Australia (RBA) statement, Brent crude and the Zeng Qinghong corruption issue. The RBA is not sure whether the …

This Invast Insights report touched on three important topics - the Reserve Bank Of Australia (RBA) statement, Brent crude and the Zeng Qinghong corruption issue. The RBA is not sure whether the global economy is now in a good condition so it emphasized the importance of stability of interest rates. While, Trading charts show that Brent crude is looking vulnerable with the possibility of a temporary pullback. Observing indices like the Dow Jones, the markets continued to fall lower during the first quarter of this year. We also kept watch on China's political instability in relation to Chinese President Xi Jinping’s anti-corruption campaign. His next target is Zeng Qinghong.


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  • 1. Invast Insights Week Commencing February 10, 2014
  • 2. www.invast.com.au | 1800 468 278 This week we look at the following topics: 1.0 RBA Statement & what you didn’t miss 2.0 New ASX small caps for your watch-list 3.0 Brent crude about to break-out? 4.0 Technical outlook for the Dow Jones 5.0 Zeng Qinghong – write the name down
  • 3. www.invast.com.au | 1800 468 278
  • 4. www.invast.com.au | 1800 468 278 1.0 RBA Statement & what you didn’t miss If you didn’t read the Reserve Bank of Australia (RBA) statement today, you haven’t missed much. Unless you have a couple of free minutes in your day, the rest of this note is not really that necessary. For those with some time to ponder, read on. There basically was no real new news, again a whole statement about where the economy is and despite higher than expected inflation the RBA is still expecting the rate to remain within the target range of 2-3%. The RBA knows very well that what happens overseas is really the key driver for where Australian rates are heading. It is very difficult to see the RBA raising rates when the yield on US 10 year treasuries is falling and at last check somewhere in the order of 2.50%. If there was one line worth reading in the
  • 5. www.invast.com.au | 1800 468 278 RBA statement, we think it would have been the last one. The sentence said “…on present indications, the most prudent course is likely to be a period of stability in interest rates…” That means the RBA still hasn’t figured out if the global economy is back in good enough a condition for it to start increasing interest rates. The situation is not bad enough to consider more cuts so 2014 is likely to be a year of waiting and seeing. Don’t expect much. Bottom line: Interest rates will remain low in Australia for some time yet. The key risk is a rise in the rate of unemployment and any increase in inflation is still unlikely to spook the RBA until it starts rising consistently above the 2-3% target band range. We need at least two more quarters to confirm this. US 10 year bond yields are the key trigger – if they continue falling then the appetite for global risk assets will continue to fall. The Australian dollar spiked briefly on the RBA statement but still remains within a downward trend. Shorts were squeezed but any upward momentum on solid volume, over a prolonged period of time, is difficult to see until global appetite for risk reverses. If you’re expecting an excitement from the RBA in 2014, you may be disappointed.
  • 6. www.invast.com.au | 1800 468 278 Image: AUDUSD daily timeframe chart via Invast cTrader platform
  • 7. www.invast.com.au | 1800 468 278 • The 78.6% Fibonacci retracement off January’s fill is currently at around 0.900 where we see resistance. This is the “gateway” level and the most important to watch. • Any break above this level could see the next resistance tested at 0.9015 and then somewhere in the order of 0.9200-0.9300. • Any failure of the 0.9000 gateway level could see downside support at 0.8850 and 0.8800 – both these are the previous support and resistance levels as well as the 50% and 38.2% Fibonacci retracement levels. 2.0 New ASX small caps for your watch-list While the mainstream media and finance community ponder on the falls in the global indices and the RBA decision, we at Invast have our head down working hard to find you more hidden gems listed on the ASX. Our first publication introduced 15 hidden gems which were revised and updated in
  • 8. www.invast.com.au | 1800 468 278 in our 2014 Forecast Guide special report. The performance of those stocks has been excellent and even surprised us. The three stocks we introduced were Adslot (ADJ), Mobile Embrace (MBE and Moko.mobi (MKB) which has since been renamed.The report was published on 9 September 2013. As of the time of writing the three stocks are up 72%, 105% and 235% respectively. This might be hard to believe but you can check the price performance for yourself. We didn’t expect such a large magnitude of gains but our premise was that while most of the market focuses on where BHP, Rio Tinto and the Big 4 banks are heading we think the smart money is focused on the small growth opportunities which go under the radar. Regular readers of this report will also note that we have been closely monitoring the performance of Ellex Medical (ELX) which has also been a solid performer since we first introduced the stock and have published our interview with the CEO over the past couple of weeks.
  • 9. www.invast.com.au | 1800 468 278 Most fund managers don’t catch onto these businesses until the large gains have been made. At Invast we aim to bring you these opportunities where possible – there will be times when we get them terribly wrong and other times where we see phenomenal returns like the three stocks above so you need to take this into consideration. At no point do we consider our selections to be perfect or immune from shocks. The three stocks mentioned above can easily fall in value overnight. They are small businesses and liquidity in trading can cause large levels of volatility. So with that in mind we have a selection of new businesses that we think are very well placed to benefit this year. Freedom Foods (FNP) – Australian food and agricultural businesses have come under the spotlight after the much publicised takeover battle for Warrnambool Cheese and Butter (WCB). One of the stocks on our 15 hidden gems list published in August was Webster Limited (WBC) – a land based good production company with two main operation businesses in walnuts
  • 10. www.invast.com.au | 1800 468 278 and onion production. The stock has rallied more than 60% over the past six months. We think Freedom Foods (FNP) has similar attributes and is shaping up like a very attractive business. Freedom has a market value of around $375m and is trading on a very high price to earnings ratio – somewhere in the order of 50x but there is room and scope for significant upside. The business manufactures food in to the niche nutrition and long life markets. It also owns around 18% of New Zealand listed A2 Corporation – you might recognise A@ products in your supermarket is you have intolerance to certain types of lactose based products. Freedom is starting to leverage its production facilities – its Pactum product range white labels long life milk and other similar dairy products, it has specialty seafood brands and is pushing into the nutrition space in the United States with distribution deals in major supermarket chains.
  • 11. www.invast.com.au | 1800 468 278 Gearing (debt/equity) is now down to 10% which means the business can draw down on its debts and make attractive acquisitions. This stock is a major play in the growth of the world’s population and demand for food manufacturing businesses. The world’s population is projected to rise to 9.1 billion people by 2050 which will require a 70% increase in food production over the next forty years. Many food producers use genetically modified organisms (GMO) but Freedom has built its business around excluding these and opting to produce and market a more natural range of products through its supply chain.We think it is worth a close look. Analytica (ALT) – We believe biotechnology stocks are a great way to lose money. Out of all the blue sky stories that your author has seen over the years, very few actually make money yet alone post positive returns to shareholders. Most businesses in the biotechnology space end up going broke, running out of cash before they can commercialise their technology. It’s not that the technology itself isn’t interesting, but it takes exceptional management and a bit of luck to take an idea through the regulatory hurdles and then into commercialisation, without completely diluting shareholders into oblivion.
  • 12. www.invast.com.au | 1800 468 278 As your author writes this report his wife is expecting to deliver her third child – one of the many joys in life. You might be asking what this has to do with investments and stock selection. Analytica have a key product that helps in the treatment of female incontinence – one of the inconveniences of females falling pregnant. It’s not just pregnancy, Analytica estimate that this impacts one in three women. The key product produced by Analytica (image on the left) to target this health issue is called PeriCoach and you can judge for yourself its success by visiting www.pericoach.com. We reason we think this stock is worth adding to your watch list is because the market capitlisation is currently at around $16m and the business has around $1.4m in cash which might be enough to see it through until cash starts rolling through from sales of its products.This is an Australian product which has the potential to help change people’s lives. The probability might be very low of
  • 13. www.invast.com.au | 1800 468 278 this actually succeeding but the payoff is massive if things work out well. The business raised $2.2m in an underwritten placement via Patersons Securities in October so there does seem to be some corporate support if cash dries up again. The board was recently boosted by the appointment of life sciences industry veteran Carl Stubbings who joined last month. The chart below summarises where Analytica is in its commercialisation process. Image sourced from November investor presentation.
  • 14. www.invast.com.au | 1800 468 278
  • 15. www.invast.com.au | 1800 468 278 Nearmap (NEA) – You have probably spent time on Google Maps and seen the amazing work that the free service has to offer. You can zoom into your house from a street or satellite view and a whole industry has grown off the back of of this. Real Estate agents now and easily incorporate Google’s data into their listing to help market your property, builders and trades people can quickly review the nature and scope of your house and a whole list of other professions benefit from this amazing free service. Nearmap is in the same space – it provides high resolution aerial images to a whole list of clients including professionals like agents and
  • 16. www.invast.com.au | 1800 468 278 architects plus governments and construction businesses looking at scoping work. Nearmap recently signed an agreement with Google. Nearmap will provide high resolution coverage maps to areas that aren’t already captured by Google’s own imagery. Nearmap now has agreements with Amazon and Google. The technology covers more than 85% of Australia’s population. The current market capitlisation of the business is sitting at around $185m but the business is yet to book a profit, barely profitable at the operating level. The market is of the view that more clients will eventually opt to pay for Nearmap’s high resolution imagery and content providers will start integrating more of their business functions off these features. Google for example plans to launch driverless cars, has purchased taxi booking software providers and looking at potentially integrating this all into their business model.
  • 17. www.invast.com.au | 1800 468 278 It’s unclear if Nearmap will continue to evolve or become an obsolete product provider in the next ten years. Melbourne IT is a perfect example of a business that once had a dominant position (the only domain registrar of .com.au in Australia) but then was subject to competitive pressures as the online and technology space evolved. Nearmap has rallied hard over the past year, the shareprice has risen by multiples but net operating cashflow continues to build solidly so we think it still deserves to be on your watch list and perhaps even part of a very well diversified portfolio. It has the potential to be a game-changer, if management can execute well and commercialise the technology. We aim to speak to the company in the coming weeks and report our findings in the same way we did for Ellex Medical (ELX) via a CEO chit-chat section. 1300 Smiles (ONT) – Fancy a visit to the dentist? 1300 Smiles is likely to be one of your dental clinics if you live in one of the ten most popular cities in Queensland. The business also recently launched into Adelaide. It’s not usually one of the first stocks investors think of when looking for exposure into the small cap spaces but ask any of your friends and relatives which profession
  • 18. www.invast.com.au | 1800 468 278 they think make good money and there is no doubt that dentists will be on the list. We like the businesses because it has scale capabilities, it has the ability to expand into other parts of the country and become a national brand with marketing and operating cost advantages – like Specsavers for example. The dental industry is currently going through a rough patch after the removal of a government scheme which subsidised dental work for those on low incomes or with chronic diseases. Like all government subsidies this created and artificial inflation in the earnings of the average dentist practices. As the work dried up in a very short period of time, many dentists were left with an earnings gap and so there has been widespread angst with some looking at exiting the industry or opting for early retirement. The long term demand for oral services by a dentist meanwhile continues to remain strong, particularly with an ageing population.
  • 19. www.invast.com.au | 1800 468 278 Smiles has been successful in working with the public sector who is starting to outsource certain dental procedures for which waiting times have risen to an unsustainable 10 years in some cases. It’s a nice niche business that we will continue to monitor. 3.0 Brent crude about to break-out? We recently published an update on the Brent crude prices where we noted a rejection around the Ichimoku cloud region. While we are generally more bullish than bearish on energy this year – we wrote extensively why in our 2014 Forecast Guide earlier in January – there could be a temporary pullback which will create a medium term buying opportunity. Brent crude is looking vulnerable on the charts as of the time of writing. Click on the video like above to hear Vito Henjoto talking talk through charts and giving his exact levels. We have a strong rejection at around the US$108 per barrel level, the level has been tested at least six times over the past two
  • 20. www.invast.com.au | 1800 468 278 Click here: http://blog.invast.com.au/finance/forex-trading-strategy-update-with-vito-henjoto-03-february-2014#.U3igVvmSx1Z
  • 21. www.invast.com.au | 1800 468 278 weeks and there has been a strong rejection near this level. On the downside US$105.25 will be a key test level – a level we mentioned last year where we though Brent would trade within the $103-112 range. We are now tightening that range. 4.0 Technical outlook for the Dow Jones We continue to see the markets falling lower in the first quarter of this year, as advised in our 2014 Forecast Guide special. As you can tell we have mentioned this document several times now in this report and so it’s worthwhile casting another eye over it in case you have forgotten some of our key calls. The Dow Jones is one of the indices which we continue to see downside momentum, US corporate results have been reasonable but they have not performed as well as expected. When the market rises analysts boost their earnings and good corporate earnings eventually become a victim of their own success. The expectations bar continues to rise towards unrealistic levels.
  • 22. www.invast.com.au | 1800 468 278 Watch the full technical analysis video here: http://blog.invast.com.au/finance/forex-trading-strategy-update-vito-henjoto-04-february- 2014#.U3ip8ihqnp1
  • 23. www.invast.com.au | 1800 468 278 This downturn is welcomed, we are starting to see more sensible valuations which is very important for the long term sustainability of equities markets. For the US30 Index we see the following: • Temporary base support potentially around 15,363 level despite the large falls already booked • We see momentum still to the downside, major test will be at around 15,700 to see if that level can hold on any short term rally of if this is rejected then continuation to the downside. • The US30 is now trading below the Ichimoku cloud on the daily timeframe, not seen since last October. On the weekly timeframe we still haven’t touched the Ichimoku cloud so still room for more downside. If support gives way at 15,363 area then we could see next support level all the way down at 14,200 range.
  • 24. www.invast.com.au | 1800 468 278 5.0 Zeng Qinghong – write the name down We’re hearing rumours that the next target for Chinese President Xi Jinping’s anti corruption campaign is Zeng Qinghong – write down the name. We aren’t sure if these rumours have any substance but if they do turn out to be true the ramifications of prosecuting somebody like Zeng are significant. Zeng served as chief of the Communist Party’s powerful Organisation Department and sat on the previous Politburo Standing Committee under the former President Hu Jintao. He is a senior figure, albeit
  • 25. www.invast.com.au | 1800 468 278 albeit from the former regime. Any efforts to prosecute Zeng will be met with large pushback and resistance. We have already seen the huge political stalemate from the prosecution of Bo Xilai – a former member of the Politburo and secretary of the Communist Party’s Chongqing branch. The decision to target Zeng – if the rumours are true – either suggests that Xi’s administration is confident in its position or is desperate to strip its opponents of power. The Chinese rumour mill often contains fabrications but occasionally – like the case with Bo Xilai and Zhou Yongkang – reveal some truth. Zhou is believe to be under close supervision and while he has not been official prosecuted yet, his involvement in the state owned oil sector and energy bureaucracy was aided by Zeng’s promotion. We’re not sure what will come of this but China is at a crucial moment in history, political instability is the greatest threat to the entire system and while we are bullish on China’s long term prospects, we will continue to watch
  • 26. www.invast.com.au | 1800 468 278 rumours and anecdotal evidence that might evolve into a large scale political crisis. For now, we just want you to take note and write down the name. Read through our blog for more relevant trading insights.
  • 27. www.invast.com.au | 1800 468 278 7.0 Disclaimer Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us. General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
  • 28. www.invast.com.au | 1800 468 278 Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances. General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. *Distributed with the permission of Invast.com.au